3 legal issues freelancers need to know

Feb 9, 2017

Have you been thinking about calling it quits on your nine-to-five job and setting yourself up as a freelancer? Having the ability to work where, when, and how you want to can be liberating and there are a wealth of freelance writing opportunities available.

Close to 55 million Americans are considered freelancers and that number is expected to grow 50% by 2020. While the freelance world can be alluring, there are many things you should consider before jumping in and applying for jobs.

The legal aspects of freelancing are often overlooked, but they are nonetheless important to understand. Starting a successful freelance career is difficult enough. The last thing you need is added legal trouble. Avoiding the three following legal pitfalls will prevent you from receiving a correspondence threatening legal action or a visit from the IRS.

1) Freelancing As A Sole Proprietor

Sole proprietorships are the most basic and common business entities for freelancers to work under. There is no paperwork required to become a sole proprietor and freelancers maintain complete control of their business.

Additionally, the overall tax rate for sole proprietorships are the lowest in comparison with all other forms of business entities. However, as a sole proprietor there is no legal separation between you and your business.

Without any kind of legal separation, sole proprietors are held personally responsible for civil liabilities, financial losses, and any illegal acts of others working on their behalf. All of a sole proprietor's assets, including personal property and bank accounts, are left at risk in the event a creditor seeks debt repayment.

While documentation and a small filing fee is required, the best route for freelance writers is to form a single-member LLC. Under a single-member LLC your personal assets will be shielded from liabilities associated with your business. However, the liability protection of a single-member LLC is much easier to pierce than a multiple-member LLC. In fact, certain cases in Colorado have allowed creditors to reach the personal assets of SMLLC businesses. Even though forming a single-member LLC does not offer complete protection, it is still far better than writing under a sole proprietorship.

2) Tax Implications

Figuring out when and how to pay taxes often confuses freelancers. Most individuals are aware they are required to pay federal and state taxes. However, freelancers often underestimate how much they are required to pay, especially on the local level. Information on what local taxes business owners owe can typically be found on the website of the city where they’re conducting business.

Perhaps the most common offense freelancers commit is in failing to pay quarterly estimated business and personal taxes on the federal, state, and local levels. It’s extremely important for you as a freelancer to maintain detailed records of all income and expenses for reporting purposes.

Unless you form a corporation, all of your profits and losses will be reported on a Schedule C form, which will then be included in your 1040. Sole proprietors with client paychecks over $600 should receive an accompanying 1099 form with their pay, as well as single member LLCs. Nonetheless, even if a 1099 form is not received all income should still be reported.

3) Conflicts With Current Employers

Not all freelancers work as independent hires full-time. In fact, 30% of all freelancers work part-time as a means of earning money on the side. If you’ve decided to work as a freelancer on the side, or want to test the waters before quitting your full-time job, you should consider the legal implications that could arise with your current employer.

The first thing to do before becoming a freelancer-for-hire is to double check your employment contract to make sure you’re not violating any existing non-compete clauses. Aside from violating non-compete agreements, freelancers also have to be wary of accidentally leaking confidential information or trade secrets. Providing either of those two things to another employer or client could land you in a mess of legal trouble. It’s easier said than done, but keep your two work worlds separate from each other.

Additional Considerations

As a freelancer, your hard work and industry expertise should be fairly compensated. In addition to the three legal considerations above, you’ll also want to understand your intellectual property rights as a creator.

Reading contracts can be tedious, but it’s in your best interest to read your potential client’s contracts in its entirety before offering to work for them.

Have you run into any of these legal issues? Are there additional freelance legal concerns you may have? Leave a comment below.

Bimal Saraiya, owner of Saraiya Pllchas, been assisting businesses in legal matters in Plano, Texas, and surrounding areas for over five years. His philosophy is to provide client-centered representation that is aggressive and thorough.

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Bimal Saraiya

Bimal Saraiya has been assisting businesses in legal matters in Plano, Texas for over five years. His philosophy is to provide client-centered representation that is aggressive and thorough.