Incredibly basic question on freelancing, invoices and self-employment
August 17, 2014 8:30 AM Subscribe
This is extremely basic, I know, but I can't seem to find a good answer on this: I'm transitioning out of my full-time job to working on freelance gigs. The only problem: I'm starting to put together invoices, and it seems like you might need a company name to do so. Is that correct? Does one need a registered company/incorporation to freelance?
According to wikipedia, invoices can only be issued by "legal entities." Wave, an app recommended by the Freelancers Union, asks for a Company Name. On the other hand, I'm not seeing a lot mentioned about this in places I'd expect to if it's ubiquitous.
Does every single freelancer set up a legal company and I just didn't realize it? How about people that are just doing part-time gigs here and there? If not, how exactly do folks get paid in a legal manner when just contracting themselves out? If so, what's next? To be clear, I'm working as essentially a consultant on digital/online strategy - helping folks doing good work in the world optimize what they do online, start to improve their social media, etc.
In a lot of ways, this is the natural result of my fuck-this-I-simply-can't-do-this-anymore AskMe from a few months back - it's exciting to start to make an important step to something better, but I'm a little overwhelmed by the inability to quickly find a clear answer.
According to wikipedia, invoices can only be issued by "legal entities." Wave, an app recommended by the Freelancers Union, asks for a Company Name. On the other hand, I'm not seeing a lot mentioned about this in places I'd expect to if it's ubiquitous.
Does every single freelancer set up a legal company and I just didn't realize it? How about people that are just doing part-time gigs here and there? If not, how exactly do folks get paid in a legal manner when just contracting themselves out? If so, what's next? To be clear, I'm working as essentially a consultant on digital/online strategy - helping folks doing good work in the world optimize what they do online, start to improve their social media, etc.
In a lot of ways, this is the natural result of my fuck-this-I-simply-can't-do-this-anymore AskMe from a few months back - it's exciting to start to make an important step to something better, but I'm a little overwhelmed by the inability to quickly find a clear answer.
I am not a lawyer and this is not legal advice.
However, I am a freelance writer who has done up invoices for writing jobs. I did not incorporate as a legal entity, and when it came to "company name" I just put my own name. I have heard precisely zero questions about whether I was a legal entity, and I got paid just fine.
However, this may be because I was being paid diddley-squeak in terms of amounts ($125 for one gig here, $25 for one gig there) and this was all effectively under the table. I can't speak to whether that makes a difference between "incorporate vs. don't", but that's my deal.
As for how to design an invoice, I just use the template that automatically comes with Microsoft Word.
posted by EmpressCallipygos at 8:37 AM on August 17, 2014
However, I am a freelance writer who has done up invoices for writing jobs. I did not incorporate as a legal entity, and when it came to "company name" I just put my own name. I have heard precisely zero questions about whether I was a legal entity, and I got paid just fine.
However, this may be because I was being paid diddley-squeak in terms of amounts ($125 for one gig here, $25 for one gig there) and this was all effectively under the table. I can't speak to whether that makes a difference between "incorporate vs. don't", but that's my deal.
As for how to design an invoice, I just use the template that automatically comes with Microsoft Word.
posted by EmpressCallipygos at 8:37 AM on August 17, 2014
My freelance career earns me in the low five figures and I just use my name when invoicing. My CPA is fine with this. (If I was earning more, maybe it would be a different situation.)
posted by BlahLaLa at 8:40 AM on August 17, 2014
posted by BlahLaLa at 8:40 AM on August 17, 2014
My situation is the same as BlahLaLa's. No company name needed, and accountant-approved.
posted by ferret branca at 8:42 AM on August 17, 2014
posted by ferret branca at 8:42 AM on August 17, 2014
Response by poster: Maybe just put my actual, legal name, e.g. Ash M. 3000, in place of company name in something like Wave? Thanks everyone for the answers thus far.
posted by Ash3000 at 8:44 AM on August 17, 2014
posted by Ash3000 at 8:44 AM on August 17, 2014
I have both created invoices for me as a person to be paid by a company and paid invoices to people from a company. You can create an invoice just fine as a person. There may be good reasons to incorporate, but that is usually for tax and liability purposes, not invoicing.
posted by jeather at 8:44 AM on August 17, 2014 [1 favorite]
posted by jeather at 8:44 AM on August 17, 2014 [1 favorite]
Yes, use the name you want on the cheque as the company name.
posted by jeather at 8:44 AM on August 17, 2014
posted by jeather at 8:44 AM on August 17, 2014
Are you in the United States? If so, you can issue invoices as an individual and there is little-to-no national regulation on what needs to be on an invoice, or whether an invoice even needs to be issued to provide services and get paid for them. In Europe there are generally stricter regulations about registering to do business and the information that must be on invoices for tax purposes. FWIW I have been freelancing in the US for 7 years, with a six-figure income, and am not incorporated.
posted by drlith at 8:46 AM on August 17, 2014 [1 favorite]
posted by drlith at 8:46 AM on August 17, 2014 [1 favorite]
Response by poster: Just to be clear, yes, in the United States - specifically in Brooklyn, NY, if that matters. Thanks again!
posted by Ash3000 at 8:47 AM on August 17, 2014
posted by Ash3000 at 8:47 AM on August 17, 2014
You should be able to issue invoices in your own name but you need to register for self-employment in order to pay the correct taxes. I am UK-based but know enough US freelancers to be confident about this. Good luck - it's a fun journey and can lead to a much happier life!
posted by LyzzyBee at 8:49 AM on August 17, 2014
posted by LyzzyBee at 8:49 AM on August 17, 2014
Yes, you can invoice in your name and do business as yourself. This is legal. See "sole proprietor".
You shouldn't need to register as self employed, but you will have to pay self employment tax, which is basically both halves of the social security tax your employer used to pay/withhold for you. It's a noticeable bite. Don't get caught flat footed at tax time.
If you are making more than hobby $, I strongly recommend an accountant. The stress and hassle you'll save are worth a few hundred in yearly fees. Mine has saved me quite a bit of money as well, probably more than what I've paid him.
posted by mattu at 9:30 AM on August 17, 2014 [3 favorites]
You shouldn't need to register as self employed, but you will have to pay self employment tax, which is basically both halves of the social security tax your employer used to pay/withhold for you. It's a noticeable bite. Don't get caught flat footed at tax time.
If you are making more than hobby $, I strongly recommend an accountant. The stress and hassle you'll save are worth a few hundred in yearly fees. Mine has saved me quite a bit of money as well, probably more than what I've paid him.
posted by mattu at 9:30 AM on August 17, 2014 [3 favorites]
I've used email for invoices, usually with a subject line of "week ending August 23, 2014" or something like that. It's because the person who I'm doing the work for needs it for their accountant to issue me a check, or if an individual, for their own record keeping purposes (as I am an expense to them).
And yes, see a CPA, to ask about not only invoicing, but things you might want to keep record of for purposes of deductions at tax time. For instance, one job I had required quite a bit of driving, and I kept track of the mileage on a note pad. There may be other things you can deduct (or it may not be worth it, but the CPA should be able to tell you).
In all cases, I just used my name.
posted by Marie Mon Dieu at 10:31 AM on August 17, 2014
And yes, see a CPA, to ask about not only invoicing, but things you might want to keep record of for purposes of deductions at tax time. For instance, one job I had required quite a bit of driving, and I kept track of the mileage on a note pad. There may be other things you can deduct (or it may not be worth it, but the CPA should be able to tell you).
In all cases, I just used my name.
posted by Marie Mon Dieu at 10:31 AM on August 17, 2014
You are operating as a sole proprietorship, which basically means there is no separate legal entity involved. Thus, you use your name instead of a company name. If you would like your sole proprietorship to have a different name, you file "doing business as" paperwork with your state, which then allows you to use that name in the course of business, and more importantly, can be given to your bank so that they will allow you to deposit checks written to that name.
posted by wierdo at 10:42 AM on August 17, 2014 [2 favorites]
posted by wierdo at 10:42 AM on August 17, 2014 [2 favorites]
I've been self-employed multiple discrete time periods--so, for 10 years a while back, and then again for the first 7 months of this year. But you don't have to take my advice.
The IRS has a Small Business and Self-Employed Tax Center on its website that is very helpful. Here are the basics:
1. If you are in the US, no you do not have to "register" as self-employed or incorporate or form any kind of new legal entity to do what you are doing. You are what the IRS refers to as a "sole proprietorship," meaning the business is just yourself. And you don't need any kind of special number, just your SSN. (A tax accountant's advice on this would be helpful if your needs change, such as if you want to employ someone else, or if you subcontract work to other people for your clients' projects and you pay them with your own money.)
2. Your invoice only needs to look like what your clients need it to look like to agree to cut you a check. I use the invoice template in Excel. Where it has "company name" I use my first and last name. I also include my address, telephone number, and email. I do not EVER include my SSN on an invoice, because you don't know where that thing is going when you submit it. (Your client(s) will likely need you to fill out a one-time form indicating your SSN is your tax id number, which they need to correctly file forms for paying you as a 1099 subcontractor.) I also include the date I sent the invoice and a unique ID number for each invoice. YMMV but I use the year-number system for numbering. i.e., My first invoice this year was 1401, the second was 1402, and so on. This is just a helpful reference for the company you're billing, for when they cut you a check.
3. 1099 contractor. This is the IRS term for what you are. AKA self-employed. The 1099 refers to the form number you will get from each client by January 31 of each year that applies to the previous calendar year. For example, for 2014 you invoiced company ABC Corp for $10,000 and company XYZ Corp for $15,000. In January you'd get a 1099 form from both ABC and XYZ with those amounts. This is because ABC Corp and XYZ Corp have to report to the IRS that they paid you that money. Therefore, you have to be diligent about reporting your income! Because the IRS already knows.
4. You have to pay quarterly estimated federal taxes on your self-employment income. (I'm just talking federal here. You MUST also check what your individual state requires. For example, my state also requires quarterly estimated taxes. Some do not.) You pay quarterly because US income taxes are paid "as you go," meaning you have to pay taxes on money as you earn it, not at the end of the year. If you don't pay on the quarterly deadlines (check the website above) you will pay penalties in addition to the tax amount you owe.
5. Once you've done this for 6 months or so, you'll get the hang of it. It's not as complicated as it sounds, but since you are self-employed and there's no longer an HR or Finance department keeping track of your income and automatically deducting stuff--or making sure you get paid--you have to be good at paying attention to these details to make it work. The main thing to remember is that every time you're paid from an invoice, set some percentage of that money aside to pay the quarterly taxes. You'll have to pay them within 3 months of receiving that check anyway. My habit is to set aside 1/3 of the invoice amount and use it to pay my quarterly estimated taxes. You will need to calculate or estimate a tax rate for yourself.
If this sound like too much work to keep track of the details, I advise spending the $300 or so it would take to talk to an accountant to make sure you're doing everything right. Many accountants have their own systems they like their clients to use to keep everything in order throughout the tax year. Paying for good advice right as you're starting out is well worth it, believe me.
Above all, do not take tax advice from strangers on the internet! Verify everything I've said here before taking any action using the IRS website above. And heed my example: Many years ago when I set out on my first freelancing effort, I foolishly read somewhere that I should incorporate. I did so, online. As a type of corp totally inappropriate not only for my own needs, but for any one person. The tax rate was way too high. There was no undoing it. I had to pay an accountant to undo it years later, and I was ashamed and felt like a sucker. All because I didn't want to pay for advice and help the first time--before I got into that mess.
posted by ImproviseOrDie at 11:34 AM on August 17, 2014 [3 favorites]
The IRS has a Small Business and Self-Employed Tax Center on its website that is very helpful. Here are the basics:
1. If you are in the US, no you do not have to "register" as self-employed or incorporate or form any kind of new legal entity to do what you are doing. You are what the IRS refers to as a "sole proprietorship," meaning the business is just yourself. And you don't need any kind of special number, just your SSN. (A tax accountant's advice on this would be helpful if your needs change, such as if you want to employ someone else, or if you subcontract work to other people for your clients' projects and you pay them with your own money.)
2. Your invoice only needs to look like what your clients need it to look like to agree to cut you a check. I use the invoice template in Excel. Where it has "company name" I use my first and last name. I also include my address, telephone number, and email. I do not EVER include my SSN on an invoice, because you don't know where that thing is going when you submit it. (Your client(s) will likely need you to fill out a one-time form indicating your SSN is your tax id number, which they need to correctly file forms for paying you as a 1099 subcontractor.) I also include the date I sent the invoice and a unique ID number for each invoice. YMMV but I use the year-number system for numbering. i.e., My first invoice this year was 1401, the second was 1402, and so on. This is just a helpful reference for the company you're billing, for when they cut you a check.
3. 1099 contractor. This is the IRS term for what you are. AKA self-employed. The 1099 refers to the form number you will get from each client by January 31 of each year that applies to the previous calendar year. For example, for 2014 you invoiced company ABC Corp for $10,000 and company XYZ Corp for $15,000. In January you'd get a 1099 form from both ABC and XYZ with those amounts. This is because ABC Corp and XYZ Corp have to report to the IRS that they paid you that money. Therefore, you have to be diligent about reporting your income! Because the IRS already knows.
4. You have to pay quarterly estimated federal taxes on your self-employment income. (I'm just talking federal here. You MUST also check what your individual state requires. For example, my state also requires quarterly estimated taxes. Some do not.) You pay quarterly because US income taxes are paid "as you go," meaning you have to pay taxes on money as you earn it, not at the end of the year. If you don't pay on the quarterly deadlines (check the website above) you will pay penalties in addition to the tax amount you owe.
5. Once you've done this for 6 months or so, you'll get the hang of it. It's not as complicated as it sounds, but since you are self-employed and there's no longer an HR or Finance department keeping track of your income and automatically deducting stuff--or making sure you get paid--you have to be good at paying attention to these details to make it work. The main thing to remember is that every time you're paid from an invoice, set some percentage of that money aside to pay the quarterly taxes. You'll have to pay them within 3 months of receiving that check anyway. My habit is to set aside 1/3 of the invoice amount and use it to pay my quarterly estimated taxes. You will need to calculate or estimate a tax rate for yourself.
If this sound like too much work to keep track of the details, I advise spending the $300 or so it would take to talk to an accountant to make sure you're doing everything right. Many accountants have their own systems they like their clients to use to keep everything in order throughout the tax year. Paying for good advice right as you're starting out is well worth it, believe me.
Above all, do not take tax advice from strangers on the internet! Verify everything I've said here before taking any action using the IRS website above. And heed my example: Many years ago when I set out on my first freelancing effort, I foolishly read somewhere that I should incorporate. I did so, online. As a type of corp totally inappropriate not only for my own needs, but for any one person. The tax rate was way too high. There was no undoing it. I had to pay an accountant to undo it years later, and I was ashamed and felt like a sucker. All because I didn't want to pay for advice and help the first time--before I got into that mess.
posted by ImproviseOrDie at 11:34 AM on August 17, 2014 [3 favorites]
I generally agree with mattu's advice. I'm a freelancer. I send invoices out under my name, and in general do business under my personal name. I have a personal bank account, not a business account. This has been working fine for, um, 25 years.
You can register a "DBA" (doing business as) in your state if you really want to be able to send out invoices under a company name. This is probably a nominal fee.
I have used a CPA in the past; now I use a self-described "tax guy" who is not an accountant. The difference is that he charges about ⅓ as much, and saves me about 3× as much on my taxes.
posted by adamrice at 3:36 PM on August 17, 2014
You can register a "DBA" (doing business as) in your state if you really want to be able to send out invoices under a company name. This is probably a nominal fee.
I have used a CPA in the past; now I use a self-described "tax guy" who is not an accountant. The difference is that he charges about ⅓ as much, and saves me about 3× as much on my taxes.
posted by adamrice at 3:36 PM on August 17, 2014
If you don't want to give your SSN to your clients, you can set up an EIN in your name with the IRS. But yes, you can use your name.
posted by freezer cake at 12:03 PM on August 18, 2014
posted by freezer cake at 12:03 PM on August 18, 2014
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