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“ Comprehensive, current, and savvy.”LIBRARY JOURNALYOUR ALL-IN-ONE GUIDE TO8th EditionWorkingYourselfBEING YOUR OWN BOSSFORLaw & Taxes for Independent Contractors,Freelancers & ConsultantsStephen Fishman, J.D.author of Deduct It! LowerYour Small Business Taxes Draft solid legal agreements Avoid trouble with the IRS Get paid on timeFree Legal Updates at Nolo.com
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8th editionWorking forYourselfLaw & Taxes forIndependent Contractors,Freelancers & ConsultantsStephen Fishman, J.D.LAW for ALL
EIGHTH EDITIONFEBRUARY 2011EditorLISA GUERINCover DesignSUSAN PUTNEYProductionMARGARET LIVINGSTONProofreaderSUSAN CARLSON GREENEIndexBAYSIDE INDEXINGPrintingDELTA PRINTING SOLUTIONS, INC.Fishman, Stephen.Working for yourself : law & taxes for independent contractors, freelancers & consultants / by StephenFishman. 8th ed.p. cm.Includes index.Summary: “Offers the strategies and information needed to become an independent contractor,freelancer or consultant. It explains how to structure a business, negotiate contracts, ensure payments,and understand and pay taxes. The 8th edition includes the most current legal rules for contractors, aswell as up to date tax information” Provided by publisher.ISBN 13: 978 1 4133 1331 4 (pbk.)ISBN 10: 1 4133 1331 0 (pbk.)ISBN 13: 978 1 4133 1357 4 (ebook)ISBN 10: 1 4133 1357 4 (ebook)1. Self employed Legal status, laws, etc. United States Popular works. 2. Self employed UnitedStates Handbooks, manuals, etc. 3. Self employed Taxation Law and legislation United States Popular works. 4. Independent contractors Legal status, laws, etc. United States Popularworks. 5. Independent contractors United States Handbooks, manuals, etc. 6. Independentcontractors Taxation United States Popular works. I. Title.KF390.I54F57 2011343.7305’26 dc222010038423Copyright 1997, 1998, 2000, 2002, 2003, 2004, 2006, 2008, and 2011 by Stephen Fishman.All rights reserved. The NOLO trademark is registered in the U.S. Patent and Trademark Office.Printed in the U.S.A.No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording, or otherwise without prior writtenpermission. Reproduction prohibitions do not apply to the forms contained in this product whenreproduced for personal use. For information on bulk purchases or corporate premium sales, pleasecontact the Special Sales Department. Call 800 955 4775 or write to Nolo, 950 Parker Street, Berkeley,California 94710.Please noteWe believe accurate, plain-English legal information should help you solve many ofyour own legal problems. But this text is not a substitute for personalized advice from aknowledgeable lawyer. If you want the help of a trained professional—and we’ll alwayspoint out situations in which we think that’s a good idea—consult an attorney licensedto practice in your state.
AcknowledgmentsMany thanks to:Barbara Kate Repa, Janet Portman, Amy DelPo, Lisa Guerin, Stephanie Bornstein, and AlaynaSchroeder for their superb editing.Malcolm Roberts, CPA, for reviewing the tax materials.Gary Gerard for sharing his experiences as an independent contractor.The many independent contractors throughout the country who permitted me to i nterview them.Bayside Indexing for the helpful index.Susan Carlson Greene for thorough proofreading.Margaret Livingston for diligent production work.
Table of ContentsYour Legal Companion for Working for Yourself.1for Yourself: The Good, the Bad, and the Ugly.31 WorkingWorking for Yourself: The Good.4Working for Yourself: The Bad.6Working for Yourself: The Ugly.7How to Use This Book.8the Legal Form for Your Business.92 ChoosingSole Proprietorships. 10Corporations. 16Partnerships. 31Limited Liability Companies (LLCs). 32and Protecting Your Business Name. 373 ChoosingChoosing a Legal Name. 38Choosing a Trade Name. 38Choosing a Trademark. 42Choosing an Internet Domain Name. 45Conducting a Name Search. 45Alone or Outside Office?. 474 HomePros and Cons of Working at Home. 48Restrictions on Home-Based Businesses. 51Deducting Your Home Office Expenses. 55Pros and Cons of an Outside Office. 63Leasing a Workplace. 63Deducting Your Outside Office Expenses . 65Licenses, Permits, and5 ObtainingIdentification Numbers. 69Business Licenses. 70Employer Identification Numbers (EINs). 71Sales Tax Permits. 74
Your Business and Yourself. . 756 InsuringHealth Insurance. 77Disability Insurance. 85Business Property Insurance. 87Liability Insurance. 89Car Insurance. 91Workers’ Compensation Insurance. 91Other Types of Insurance. 94Ways to Save on Insurance. 94Your Services and Getting Paid. 977 PricingPricing Your Services. 98Getting Paid.104and the Self-Employed.1218 TaxesTax Basics for the Self-Employed.122IRS Audits.129Ten Tips to Avoid an Audit.132Your Income Taxes.1359 ReducingReporting Your Income.137Income Tax Deduction Basics.139Business Use of Your Home.149Cost of Business Assets .149Car Expenses.154Travel Expenses.159Entertainment and Meal Expenses.162Health Insurance .163Start-Up Costs.166Bane of Self-Employment Taxes. .16910 TheWho Must Pay.170Self-Employment Tax Rates.170Earnings Subject to SE Taxes.171Computing SE Taxes.172Paying and Reporting SE Taxes.172Outside Employment.173
Estimated Taxes.17511 PayingWho Must Pay Estimated Taxes.176How Much You Must Pay.178When to Pay .180How to Pay.182Paying the Wrong Amount.183for Salespeople, Drivers, and Clothing Producers. .18512 RulesStatutory Employees.186Statutory Independent Contractors.189for Workers You Hire.19113 TaxesHiring People to Help You.192Tax Concerns When Hiring Employees.193Tax Concerns When Hiring Independent Contractors.200Keeping and Accounting Made Easy.20714 RecordSimple Bookkeeping.208How Long to Keep Records.219If You Don’t Have Proper Tax Records.219Accounting Methods . .220Tax Year.223Your Self-Employed Status.22515 SafeguardingWho Decides Your Work Status?.226What Happens If the Government Reclassifies You?.226Determining Worker Status.228The IRS Approach to Worker Status.229Tips for Preserving Your IC Status.234Options for the Self-Employed. .23916 RetirementReasons to Have a Retirement Plan (or Plans).240Individual Retirement Accounts (IRAs).241Employer IRAs.244Keogh Plans.245Solo 401(k) Plans.246Roth 401(k) Plans.247Retirement Plans If You Have Employees.248
Patents, and Trade Secrets. .24917 Copyrights,Intellectual Property.250Copyright Ownership.251Patent Ownership.258Trade Secret Ownership.258Using Nondisclosure Agreements.259Written Client Agreements.26718 UsingReasons to Use Written Agreements.268Reviewing a Client’s Agreement.270Creating Your Own Client Agreement.271Putting Your Agreement Together.272Changing the Agreement After It’s Signed.275Your Own Client Agreement.27719 DraftingEssential Provisions.278Optional Provisions.288Sample Client Agreement.296Using Letter Agreements.296a Client’s Agreement.30520 ReviewingMake Sure the Agreement Is Consistent With the Client’s Promises.307Make Sure the Contract Covers at Least the Basics.307Provisions to Avoid.307Provisions to Consider Adding.313Client Purchase Orders.313Beyond This Book. .31521 HelpHelp Resolving Disputes.316Finding and Using a Lawyer.319Help From Other Experts.320Doing Your Own Legal Research.321
Appendixesand DocumentsA FormsAsset LogExpense JournalIncome JournalInvoiceAgreementsB SampleGeneral Independent Contractor AgreementContract AmendmentNondisclosure AgreementIndex
Download From wWw.EbookSave.Com ww.ebooksave.com Your Legal Companionfor Working for YourselfWorking for yourself gives you free dom employees rarely get to experi ence in their professional careers.Whether you label yourself “self employed,”an “independent contractor,” a “freelancer,” a“consultant,” or even a “business owner,” youhave a unique opportunity to choose how you’lldo business, where you’ll do business, and howthe operation will run.Of course, with that freedom comes a lot ofresponsibility, too. You’ll have to generate yourown work, choose and set up the right businessentity, follow legal and tax rules, and maybeeven manage employees. The good news is, thisbook will help you do it.This book is a guide to law and taxes forpeople who either work for themselves or wouldlike to. It covers all the legal and tax basics self employed people need to know, including: the benefits and drawbacks of working foryourself the different types of business entities, andwhich one is right for you how to insure your business how to price services, write clientagreements, and get paid how to handle your taxes and use your selfemployed status to reduce them, and how to manage employees and recordkeeping.This book is intended only for those self employed people who provide personalservices, such as writers, consultants, artists,photographers, lawyers, and doctors. If yourbusiness involves selling goods (rather thanservices) to the public, this book is not foryou. Instead, you should refer to Legal Guidefor Starting & Running a Small Business, byFred Steingold (Nolo).As you will discover reading this book—if youhaven’t found out already—being self employedcan be both a dream and a nightmare. Thereare a lot of rewards and a lot of risks. The goalof this book is to help you navigate the risksso that they do not detract from the rewards,which we hope will be rich and plentiful. whether to work at home or rent an officeDownload From wWw.EbookSave.Com ww.ebooksave.com
1C H A P T E RWorking for Yourself:The Good, the Bad, and the UglyWorking for Yourself: The Good.4Independence.4Higher Earnings.4Tax Benefits.5Working for Yourself: The Bad.6No Job Security.6No Free Benefits.6No Unemployment Insurance.6No Workers’ Compensation.6No Free Office Space or Equipment.6Few or No Labor Law Protections.6Complete Business Responsibility.7Others May Discriminate.7Working for Yourself: The Ugly.7Double Social Security Tax.7Personal Liability for Debts.7Deadbeat Clients.7How to Use This Book.8Starting Up Your Business.8Ongoing Legal and Tax Issues.8
4 working for yourselfWorking for yourself can be both finan cially and spiritually satisfying. But thelot of the self-employed is not alwaysan easy one. You have to make the often difficulttransition from having an employer take care ofthe details to handling everything on your own.For example, you won’t have a company payrolldepartment to withhold and pay your taxes for you.Many self-employed people (including thosewith plenty of clients) get into trouble becausethey don’t run their operations in a businesslikemanner. Spending a few hours now to learn thenuts and bolts of self-employment law and taxescan save you countless headaches—not to mentionsubstantial time and money—later on. You don’thave to start wearing a green visor and bow tie, butyou do need to learn a few rudiments of businessand tax law.Before you delve into the details of the followingchapters, read this chapter for an overview of thepros and cons of being self-employed as comparedto being an employee. It may help you make aninformed decision if you’re thinking about strikingout on your own—or help confirm that you madethe right decision if you’re already working foryourself.Working for Yourself:The GoodBeing self-employed can give you more freedomand privacy than working for an employer. It canalso result in substantial tax benefits.IndependenceWhen you’re self-employed, you are your ownboss—with all the risks and rewards that entails.Most self-employed people bask in the freedomthat comes from being in business for themselves.They would doubtless agree with the followingsentiment expressed by one self-employed person:“I can choose how, when, and where to work, foras much or as little time as I want. In short, I enjoyworking for myself.”The self-employed are masters of their owneconomic fates. The amount of money they makeis directly related to the quantity and quality oftheir work, which is not necessarily the case foremployees. The self-employed don’t have to asktheir bosses for a raise; they go out and find morework.Likewise, if you’re self-employed, you’re normallynot dependent upon a single company for yourlivelihood, so the hiring or firing decisions ofany one company won’t have the same impact onyou as on that company’s employees. One selfemployed person explains: “I was laid off six yearsago and chose to start my own company ratherthan sign on for another ride on someone else’sroller coaster. It’s scary at first, but I’m now nolonger at someone else’s mercy.”Higher EarningsYou can often earn more when you’re self- employedthan as an employee for someone else’s business.For example, an employee in a public relations firmdecided to go out on her own when she learnedthat the firm billed her time out to clients at 125per hour while paying her only 17 per hour. Shenow charges 75 per hour and makes a far betterliving than she ever did as an employee.According to the Wall Street Journal, self- employed people who provide services are usuallypaid at least 20% to 40% more per hour thanemployees performing the same work. This isbecause companies that hire self-employed workers(referred to throughout this book as “hiring firms”)don’t have to pay half of the self-employed worker’sSocial Security taxes, or pay for unemploymentcompensation taxes, workers’ compensationcoverage, or employee benefits like health insuranceand sick leave for workers who are not theiremployees. Of course, how much you’re paid is
chapter 1 working for yourself: the good, the bad, and the ugly 5a matter for negotiation between you and yourclients. Self-employed people whose skills are ingreat demand may receive far more than employeesdoing similar work.Tax BenefitsSelf-employment also provides many tax benefitsthat aren’t available to employees. For example,no federal or state taxes are withheld from yourpaychecks by an employer as they must be for employees. Instead, the self-employed normallypay their own estimated taxes directly to the IRSfour times a year. This means you can hold on toyour hard-earned money longer.
patent at Nolo.com. For simpler matters, download one of our hundreds of high-quality legal forms, including bills of sale, promissory notes, nondisclosure agreements and many more. Lawyer Directory Find an attorney at Nolo.com. Nolo’s unique lawyer directory provides in-depth profi
