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How to Start a Freelance Business

Everything you need to know about legal, tax and contractual paperwork

5. Annual tax reporting: The 1099 form – If you've earned more than $600 in a year from a client, they have to report these payments to the IRS through Form 1099-Misc. Your client will send you a copy by the end of January each year. Be sure it's accurate — does the amount the client stated he paid you match your records? You don't have to do anything with the form other than file it in your records and use it as a reference when you report your annual income to the IRS. Think of it as the freelancer's equivalent of the W-2 form.

We've deliberately excluded incorporation as a must-do legal and regulatory step for freelancers. Incorporation isn't a legal must-do. While it has its benefits, it can also have cost disadvantages. To help you decide if incorporation is right for you, take a look at the Should You Incorporate Your Freelance or Consulting Business? guide. SBA's Incorporating Your Business guide is also a useful reference.

Essential Business-Ready Documentation for Freelancers

Here's a list of some of the day-to-day documentation and paperwork that you will likely need or encounter as a freelancer:

1. Cost estimate and proposal documents – Give your business a professional touch by creating your own branded template for project quotes and proposals. You can pay a graphic designer to create many of your basic business documents and graphics, or use freely available templates in software such as Microsoft Word and Google Docs.

2. Contract documents and NDAs – Most clients will have their own contracts in place for independent contractors or freelancers. Be sure to read through the terms carefully. Don't be afraid to question anything that doesn't make sense or is irrelevant. A Nondisclosure Agreement (NDA) is usually included and is pretty standard. It requires you to agree to the client's legal rights for protecting company knowledge or information you may have access to during the course of business, as well as intellectual rights relating to the work you produce.

3. Statement of Work – Even if you have a client contract in place, many clients will also ask for individual Statements of Work (SOW) for each project. It's a good idea to volunteer one even if they don't ask for it. A SOW is a project-specific agreement outlining the mutually agreed scope of work and the time frame for its completion. It sets expectations, deliverables and the price. It may also include information on resources needed for the project, including roles and responsibilities on both sides. The secret to a good SOW is to avoid being vague — if it's too broad and nonspecific, you may end up with a dispute. Once the SOW is agreed and signed, you are ready to begin the project.

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