Working for Yourself

Law & Taxes for Independent Contractors, Freelancers & Consultants

Working for Yourself

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Working for Yourself

, J.D.

, 9th Edition

Self-employed? Whether you're an independent contractor, freelancer, consultant, or considering self-employment, it all adds up to the same thing: you need to be more aware of laws and taxes than the average person. Get all the information you need to know to:

  • obtain permits and licenses
  • comply with strict IRS rules
  • avoid unfair contracts
  • get insurance for youself and your business

See below for a full product description.

 

Available as part of the Nolo's Home Business Bundle

Start your business off on the right foot

Ready to be your own boss?  Congratulations!  This book provides all the legal and tax information you need.

Whether you need to draft a contract, price your services, maximize your tax deductions, or sort out your benefits options, we’ve got you covered. Find out how to:

  • determine how much to charge your clients
  • write legally binding contracts and letter agreements
  • qualify for independent contractor tax treatment
  • make the most of your tax deductions
  • get benefits (including health coverage)
  • keep accurate records in case you get audited
  • make sure you're get paid in full and on time

The 9th edition is completely revised to provide the up-to-date information you need, including recent changes in tax law and new benefit options available through Obamacare.

 

“As an independent contractor, you are your boss. This is why Fishman’s book is so important.”-New Orleans Times-Picayune

“Covers everything independent contractors need to know.”-Business Life

ISBN
9781413319811
Number of Pages
568
Included Forms

    Forms and Documents

    • Asset Log
    • Expense Journal
    • Income Journal
    • Invoice

    Sample Agreements

    • General Independent Contractor Agreement
    • Contract Amendment
    • Nondisclosure Agreement

1. Working for Yourself: The Good, the Bad, and the Ugly

  • Working for Yourself: The Good
  • Working for Yourself: The Bad
  • Working for Yourself: The Ugly
  • How to Use This Book

2. Choosing the Legal Form for Your Business

  • Sole Proprietorships
  • Corporations
  • Partnerships
  • Limited Liability Companies (LLCs)

3. Choosing and Protecting Your Business Name

  • Choosing a Legal Name
  • Choosing a Trade Name
  • Choosing a Trademark
  • Choosing an Internet Domain Name
  • Conducting a Name Search

4. Home Alone or Outside Office?

  • Pros and Cons of Working at Home
  • Restrictions on Home-Based Businesses
  • Deducting Your Home Office Expenses
  • Pros and Cons of an Outside Office
  • Leasing a Workplace
  • Deducting Your Outside Office Expenses

5. Obtaining Licenses, Permits, and Identification Numbers

  • Business Licenses
  • Employer Identification Numbers (EINs)
  • Sales Tax Permits

6. Insuring Your Business and Yourself

  • The Health Care Reform Act ("Obamacare")
  • Disability Insurance
  • Business Property Insurance
  • Liability Insurance
  • Car Insurance
  • Workers’ Compensation Insurance
  • Other Types of Insurance
  • Ways to Save on Insurance

7. Pricing Your Services and Getting Paid

  • Pricing Your Services
  • Getting Paid

8. Taxes and the Self-Employed

  • Tax Basics for the Self-Employed
  • IRS Audits
  • Ten Tips to Avoid an Audit

9. Reducing Your Income Taxes

  • Reporting Your Income
  • Income Tax Deduction Basics
  • Business Use of Your Home
  • Cost of Business Assets
  • Car Expenses
  • Travel Expenses
  • Entertainment and Meal Expenses
  • Health Insurance
  • Start-Up Costs

10. The Bane of Self-Employment Taxes

  • Who Must Pay
  • Self-Employment Tax Rates
  • Earnings Subject to SE Taxes
  • Paying and Reporting SE Taxes
  • Outside Employment

11. Paying Estimated Taxes

  • Who Must Pay Estimated Taxes
  • How Much You Must Pay
  • When to Pay
  • How to Pay
  • Paying the Wrong Amount

12. Rules for Salespeople, Drivers, and Clothing Producers

  • Statutory Employees
  • Statutory Independent Contractors

13. Taxes for Workers You Hire

  • Hiring People to Help You
  • Tax Concerns When Hiring Employees
  • Tax Concerns When Hiring Independent Contractors

14. Record Keeping and Accounting Made Easy

  • Simple Bookkeeping
  • How Long to Keep Records
  • If You Don’t Have Proper Tax Records
  • Accounting Methods
  • Tax Year

15. Safeguarding Your Self-Employed Status

  • Who Decides Your Work Status?
  • What Happens If the Government Reclassifies You?
  • Determining Worker Status
  • The IRS Approach to Worker Status
  • Tips for Preserving Your IC Status

16. Retirement Options for the Self-Employed

  • Reasons to Have a Retirement Plan (or Plans)
  • Individual Retirement Accounts (IRAs)
  • Employer IRAs
  • Keogh Plans
  • Solo 401(k) Plans
  • Roth 401(k) Plans
  • Retirement Plans If You Have Employees

17. Copyrights, Patents, and Trade Secrets

  • Intellectual Property
  • Copyright Ownership
  • Patent Ownership
  • Trade Secret Ownership
  • Using Nondisclosure Agreements

18. Using Written Client Agreements

  • Reasons to Use Written Agreements
  • Reviewing a Client’s Agreement
  • Creating Your Own Client Agreement
  • Putting Your Agreement Together
  • Changing the Agreement After It’s Signed

19. Drafting Your Own Client Agreement

  • Essential Provisions
  • Optional Provisions
  • Sample Client Agreement
  • Using Letter Agreements

20. Reviewing a Client’s Agreement

  • Make Sure the Agreement Is Consistent With the Client’s Promises
  • Make Sure the Contract Covers at Least the Basics
  • Provisions to Avoid
  • Provisions to Consider Adding
  • Client Purchase Orders

21. Help Beyond This Book

  • Mediation and Arbitration
  • Filing a Lawsuit
  • Finding and Using a Lawyer
  • Help From Other Experts
  • Doing Your Own Legal Research

Appendix

Using the Interactive forms

Editing RTFs

List of Forms

Index

Chapter 1
Working for Yourself: The Good, the Bad, and the Ugly

Working for Yourself: The Good

     Independence

     Higher Earning Potential

     Tax Benefits

Working for Yourself: The Bad

     No Job Security

     No Free Benefits

     No Unemployment Insurance

     No Workers’ Compensation

     No Free Office Space or Equipment

     Few or No Labor Law Protections

     Complete Business Responsibility

     Others May Discriminate

Working for Yourself: The Ugly

     Double Social Security Tax

     Personal Liability for Debts

     Deadbeat Clients

How to Use This Book

     Starting Up Your Business

     Ongoing Legal and Tax Issues

 

Working for yourself can be both financially and spiritually satisfying. But the lot of the self-employed is not always an easy one. You have to make the often difficult transition from having an employer take care of the details to handling everything on your own. For example, you won’t have a company payroll department to withhold and pay your taxes for you.

Many self-employed people (including those with plenty of clients) get into trouble because they don’t run their operations in a businesslike manner. Spending a few hours now to learn the nuts and bolts of self-employment law and taxes can save you countless headaches—not to mention substantial time and money—later on. You don’t have to start wearing a green visor and bow tie, but you do need to learn a few rudiments of business and tax law.

Before you delve into the details of the following chapters, read this chapter for an overview of the pros and cons of being self-employed as compared to being an employee. It may help you make an informed decision if you’re thinking about striking out on your own or help confirm that you made the right decision if you’re already working for yourself.

Working for Yourself: The Good

Being self-employed can give you more freedom and privacy than working for an employer. It can also result in substantial tax benefits.

Independence

When you’re self-employed, you are your own boss, with all the risks and rewards that entails. Most self-employed people bask in the freedom that comes from being in business for themselves. They would doubtless agree with the following sentiment expressed by one self-employed person: “I can choose how, when, and where to work, for as much or as little time as I want. In short, I enjoy working for myself.”

The self-employed are masters of their own economic fates. The amount of money they make is directly related to the quantity and quality of their work, which is not necessarily the case for employees. The self-employed don’t have to ask their bosses for a raise; they go out and find more work.

Likewise, if you’re self-employed, you’re normally not dependent upon a single company for your livelihood, so the hiring or firing decisions of any one company won’t have the same impact on you as on that company’s employees. One self-employed person explains: “I was laid off six years ago and chose to start my own company rather than sign on for another ride on someone else’s roller coaster. It’s scary at first, but I’m now no longer at someone else’s mercy.”

A Golden Age for the Self-Employed?

In the past, most people were self-employed. They owned and worked on farms or had their own small businesses. This changed in the 19th century, when the Industrial Revolution created massive factories and offices manned by wage slaves. Now, the process is reversing itself. Indeed, the growth in the number of the self-employed has been dubbed the “Industrial Revolution of our time.”

Working for yourself is still no paradise. However, since the first edition of this book was published in 1997, the downsides outlined in this chapter are generally not as bad or ugly as they used to be, while the good is getting even better for many. Some of the factors that make being self-employed better than ever before include:

More work: It’s common today for businesses of all sizes to hire independent contractors, even those who work out of their homes.

Less discrimination: Self-employed people are generally no longer viewed as losers who can’t get “real jobs” or be trusted with a mortgage or credit card. Indeed, many wage slaves stuck in their cubicles dream of working for themselves.

The Internet: The Internet makes it much easier and cheaper for self-employed people to market their services, exchange information, and communicate with clients and customers.

Obamacare: The advent of Obamacare makes it possible for every self-employed person to obtain health insurance coverage, even those with preexisting conditions. This has freed millions of people from “job lock”: the inability to leave a job because it provides health insurance. Obamacare allows low and moderate income people, including independent contractors, to qualify for government subsidies to help them afford health coverage. And, more firms want to hire independent contractors instead of employees so they can avoid the law’s mandatory coverage requirements for employers. (See Chapter 6 for a detailed analysis of Obamacare.)

Solo support industry: A growing solo worker support industry has developed. This includes unions and other organizations for the self-employed (such as the Freelancers’ Union), and inexpensive or free software and applications freelancers can use for bookkeeping, invoicing, project tracking, contact creation, and tax preparation.

 

Higher Earning Potential

You can earn more when you’re self-employed than as an employee for someone else’s business. For example, an employee in a public relations firm decided to go out on her own when she learned that the firm billed her time out to clients at $125 per hour while paying her only $17 per hour. She now charges $75 per hour and makes a far better living than she ever did as an employee.

Of course, how much you’re paid is a matter for negotiation between you and your clients. Self-employed people whose skills are in great demand may receive far more than employees doing similar work. Others might earn less than they would as employees.

Tax Benefits

Self-employment also provides many tax benefits that aren’t available to employees. For example, no federal or state taxes are withheld from your paychecks by an employer as they must be for employees. Instead, the self-employed normally pay their own estimated taxes directly to the IRS four times a year. This means you can hold on to your hard-earned money longer. It’s up to you to decide how much estimated tax to pay (although there are penalties if you underpay). The lack of withholding combined with control over estimated tax payments can result in improved cash flow for the self-employed.

More important, you can take advantage of many tax deductions that are limited or unavailable for employees. When you’re self-employed, you can deduct any necessary expenses related to your business from your taxable income, as long as they are reasonable in amount and ordinarily incurred by businesses of your type. This may include, for example, office expenses (including those for home offices), travel expenses, entertainment and meal expenses, equipment costs, and insurance payments. These are covered in greater detail in Chapter 4.

In contrast to the numerous deductions available to the self-employed, an employee’s work-related deductions are severely limited. Some deductions available to the self-employed may not be taken by employees. For example, an employee may not deduct the cost of commuting to and from work, but a self-employed person traveling from his or her office to that of a client may ordinarily deduct this expense. Even those expenses that are deductible for an employee may be deducted only to the extent they add up to more than 2% of the employee’s adjusted gross income. This means that most of an employee’s expenses related to employment cannot be deducted fully.

In addition, the self-employed can establish retirement plans, such as SEP-IRAs and solo 401(k) plans, that have tax advantages. These plans also allow them to shelter a substantial amount of their incomes until they retire.

Because of these tax benefits, the self-employed often ultimately pay less in taxes than employees who earn similar incomes.

Working for Yourself: The Bad

Despite its advantages, being self-employed is no bed of roses. Here are some of the major drawbacks.

No Job Security

As discussed above, one of the best things about being self-employed is that you’re on your own. On the other hand, this can be one of the worst things about it too.

When you’re an employee, you must be paid as long as you have your job, even if your employer’s business is slow. This is not the case when you’re self-employed. If you don’t have business, you don’t make money. As one self-employed person says: “If I fail, I don’t eat. I don’t have the comfort of punching a time clock and knowing the check will be there on payday.”

No Free Benefits

Although not always required by law, employers often provide their employees with health insurance, paid vacations, and paid sick leave. Many employers voluntarily provide health insurance now; starting in 2015, employers with at least 50 full-time equivalent employees must provide employees with minimally adequate health insurance coverage or pay a penalty to the IRS. (Employers with less than 50 employees aren’t subject to this requirement.) More generous employers may also provide retirement benefits, bonuses, and even employee profit sharing.

When you’re self-employed, you get no such benefits. You must pay for your own health insurance. (Fortunately, the Obamacare health reforms that took effect in 2014 enable all self-employed people to obtain health insurance, even if they have preexisting medical conditions; see Chapter 6 for more information.) Time lost due to vacations and illness comes directly out of your bottom line. And you must fund your own retirement. If you don’t earn enough money to purchase or create these benefits for yourself, you will have to forgo some or all of them.

No Unemployment Insurance

The self-employed also don’t have the safety net provided by unemployment insurance. Because hiring firms (companies that hire self-employed people) do not pay unemployment compensation taxes for the self-employed, these people cannot collect unemployment benefits when their work for a firm ends.

No Workers’ Compensation

Employers must generally provide workers’ compensation coverage for their employees. Employees are entitled to collect workers’ compensation benefits for injuries that occur on the job even if the injury was their own fault.

Hiring firms usually do not provide workers’ compensation coverage for the self-employed people they hire. If a work-related injury is a self-employed person’s fault, he or she has no recourse against the hiring firm. (See Chapter 6.) And even if it’s the hiring firm’s responsibility, the self-employed person will have to deal with the expense and hassle of a lawsuit.

No Free Office Space or Equipment

Employers normally provide their employees with an office or space in which to work and the equipment they need to do the job. This is not usually the case when a company hires a self-employed person, who must normally provide his or her own workplace and equipment.

Few or No Labor Law Protections

A wide array of federal and state laws protect employees from unfair exploitation by employers. Among other things, these laws:

impose a minimum wage

require many employees to be paid time and a half for overtime

prohibit discrimination and harassment

require employers to provide family and medical leave, leave for military service, or time off to vote or serve on a jury, and

protect employees who wish to unionize.

With the exception of some types of discrimination and harassment claims, few such legal protections apply to the self-employed.

Complete Business Responsibility

When you’re self-employed, you must run your own business. This means, for example, that you’ll need to have at least a rudimentary record-keeping system or hire someone to keep your records for you. (See Chapter 14.) You’ll also likely have to file a far more complex tax return than you did when you were an employee. (See Chapter 8.)

Others May Discriminate

Because you don’t have a guaranteed annual income as employees do, insurers, lenders, and other businesses may refuse to provide you with services or may charge you more than employees for similar services. It can be difficult, for example, for a self-employed person to obtain disability insurance, particularly one who works at home.

Also, it may be more difficult to buy a house because lenders are often wary of self-employed borrowers. To prove you can afford a loan, you’ll likely have to provide a prospective lender with copies of your recent tax returns and a profit and loss statement for your business.

Working for Yourself: The Ugly

Unfortunately, the bad aspects of self-employment discussed above do not end the litany of potential woes. Being self-employed can, in some respects, get downright ugly.

Double Social Security Tax

For many, the ugliest and most unfair thing about being self-employed is that they must pay twice as much Social Security and Medicare taxes as employees. Employees pay a 7.65% tax on their salaries, up to a salary amount capped by the Social Security tax limit ($117,000 in 2014). Employers pay a matching amount. In contrast, self-employed people must pay the entire tax themselves, a whopping 15.3% on their income up to the amount capped by the Social Security tax limit. This is in addition to federal and state income taxes. In practice, the Social Security tax comes to less than 15.3% because of certain deductions, but it still takes a big bite out of what you earn from self-employment. (See Chapter 10.)

What’s more, self-employed people must pay Medicare tax on their net self-employment income over the Social Security ceiling. This is a 2.9% tax on income from $117,000 to $200,000 in net self-employment income for singles and $117,000 to $250,000 for married couples filing jointly. High earners will owe a 3.8% tax on all net self-employment income that exceeds these amounts.

Personal Liability for Debts

Employees are not liable for the debts incurred by their employers. An employee may lose his or her job if the employer’s business fails but will owe nothing to the employer’s creditors.

This is not necessarily the case when you’re self-employed. If you’re a sole proprietor or partner in a partnership, you are personally liable for your business debts. You could lose much of what you own if your business fails. However, there are ways to decrease your personal exposure, such as obtaining insurance. (See Chapter 6.)

Deadbeat Clients

Ugliest of all, you could do lots of business and still fail to earn a living. Many self-employed people have great difficulty getting their clients to pay them on time or at all. When you’re self-employed, you bear the risk of loss from deadbeat clients. The government is not going to help you collect on your clients’ unpaid bills.

Clients who pay late or don’t pay at all have driven many self-employed people back to the ranks of the wage slaves. However, there are many strategies you can use to help alleviate payment problems. (See Chapter 7.)

How to Use This Book

This book will help you make what’s good about self-employment even better, make the bad aspects less daunting, and—hopefully—make the ugly aspects a little more attractive.

Exactly which portions of the book you’ll need to read depends on whether you’re already self-employed or just starting out.

Starting Up Your Business

If you’re just starting out, there are a number of tasks you’ll need to complete before or soon after you start doing business. These include:

choosing the legal form for your business (see Chapter 2)

choosing a name for your business (see Chapter 3)

deciding where to set up your office (see Chapter 4)

obtaining business licenses and permits and a federal taxpayer ID number (see Chapter 5)

obtaining insurance for your business and yourself (see Chapter 6), and

setting up at least a rudimentary bookkeeping system (see Chapter 14).

You should read the chapters discussing these tasks first.

Ongoing Legal and Tax Issues

Once your business is up and running, there are a number of ongoing legal and tax issues you may have to tackle. These include:

deciding how to price your services and taking steps to ensure you get paid (see Chapter 7)

understanding basic tax rules (see Chapter 8)

paying estimated taxes (see Chapter 11)

keeping track of your tax-deductible business expenses (see Chapters 9 and 14)

dealing with taxes for any employees or independent contractors you hire (see Chapter 13)

taking steps to ensure that the IRS doesn’t view you as an employee if you’re audited (see Chapter 15)

deciding how to fund your retirement (see Chapter 16)

using written client agreements (see Chapters 18, 19, and 20), and

dealing with ownership of the copyrights, patents, and trade secrets you create (see Chapter 17).

You can read the appropriate chapters when a problem arises or read them in advance to help you avoid problems from the outset.

This Book Comes With a Website

Nolo’s award-winning website has a page dedicated just to this book, where you can:

DOWNLOAD FORMS - All forms in this book are accessible online. After purchase, you can find a link to the URL in Appendix A.

KEEP UP TO DATE - When there are important changes to the information in this book, we will post updates

And that’s not all. Nolo.com contains thousands of articles on everyday legal and business issues, plus a plain-English law dictionary, all written by Nolo experts and available for free. You’ll also find more useful books, software, online services, and downloadable forms.

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