Step 1
Service Agreement
A Service Agreement outlines the terms of a given service between a service provider and customer.
Step 2
Independent Contractor Agreement
An Independent Contractor Agreement is a written contract that spells out the terms of a working relationship between an independent contractor and a ...
Step 3
Consulting Agreement
A Consulting Agreement is a contract involving a consultant and a client, where the consultant offers their services to the client in exchange for com...
Last Updated July 4, 2024
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As production methods evolve and technology allows us to collaborate conveniently with employers worldwide, the number of people choosing freelancing over conventional jobs is increasing every year. According to UpWork's 2020 study, 36% of American workers are freelancers.
This guide will take you through the most critical aspects of freelancing. From knowing where to look for work to filing your income taxes, we break down everything you'll need to know and why they're essential for a successful freelancing career.
For many people, being their own boss is their dream job. Working as a freelancer is one of the best ways to take control and make that happen for yourself.
A freelancer is any self-employed individual who provides a product or service to a client in exchange for compensation. Freelancers are also called contract workers, consultants, or independent contractors.
Compared to being employed as staff, freelancing comes with its risks and rewards. You have plenty of freedom to choose your projects, set your pay rates, and work preferable hours. However, you’re also responsible for your own bookkeeping and accounting, aren’t protected by workplace discrimination laws, and likely won’t have the same insurance benefits that normally come with working for an employer.
Successful freelancers have a strong understanding of contract negotiations, their rights, and their worth.
Many inexperienced freelancers will lowball themselves when negotiating their pay rate before the client has a chance to do it for themselves. This misstep can be due to a lack of confidence in their skills, not wanting to ruffle the client’s feathers, or simply not knowing how much they’re worth.
According to freelancermap's 2021 Freelancer Study, the average hourly rate for freelancers in North America is $105 per hour. However, 34% of freelancers also reported not being satisfied with their actual income.
A general rule is to charge two to three times what you would make for a similar hourly job. For example, if your skill set would get you $25 an hour with set hours, your hourly rate as a freelancer should be $50 to $75.
Freelancer rates need to be higher than full-time employees' hourly rates due to the fact that permanent employment comes with reliable income, health benefits, paid sick days, and vacation time. As a freelancer, you also have to cover your operational costs and buy your own equipment while working independently. You should factor these costs into your hourly rate.
The best way to calculate the rate you’ll charge customers is to first determine how much money you need to earn for you and your business to survive.
Make a list of your monthly personal expenses, business expenses, and estimated taxes. The sum of the list is the minimum amount you need to earn in a month. If you divide the total by the number of hours you plan to work in the month, you’ll have your basic hourly rate. Next, you should research the going rate in your target market for the kind of work you do.
However, just because you know the minimum amount you need to charge a client, that doesn’t mean that’s what your time is worth. It’s hopefully worth much more. Consider finding freelancers who post their rates online to understand better what you can charge.
Something to keep in mind is that you can always cut costs to save money or improve your skills to increase your value, but time is the one factor that you can’t change. You can only choose how you spend it, and you should do so wisely.
For example, a writer can work for a reputable magazine that pays thousands of dollars for a lengthy article, while a website wanting to pump out as much content as possible might only pay $20 for a short article. As a freelancer, it's up to you to decide how to balance the types of jobs you take on to reach the profit you desire for the month.
Whether you present your rate to the client as flat or hourly will usually depend on the client and the type of job. A flat rate is when you charge a client the set price to complete a job from start to finish. An hourly rate is the price you charge a client per hour for a service. Both options have their advantages.
Flat rates are convenient when a project has many deliverables that will take varying amounts of time and money. Presenting the client with the project's sum can make your proposal easier to understand. It also lets clients know the amount they'll owe you before the job begins.
Flat rates are also excellent for freelancers because you receive the same amount of money from the client regardless of finishing earlier than initially expected. However, this can also backfire on you if a job takes longer than anticipated.
On the other hand, hourly rates allow you to bill the client at the end of a job or periodically throughout the project. Charging an hourly rate is common in longer term projects because it makes it easy for you to adjust the project's total cost if unforeseen variables and changes to the scope of work happen. It also presents opportunities to charge overtime if you and the client agree to those terms in your agreement.
Having the agreement in writing is the best way to ensure you get paid. A potential client can come across as the most honest person you've ever met, but handshake or verbal agreements don't provide anywhere near the same security that a written contract does.
Spelling out the terms of your working relationship also reduces the chances of miscommunication and conflict. If you’re upfront with the client about how you operate, everyone will understand their responsibilities.
Creating a payment schedule in your Service Agreement also gives you a few options for receiving compensation.
A series of payments is when the client pays you periodically throughout the job. They can come on set dates or when you hit certain milestones within the project.
This payment method is better for long-term projects because it prevents you from going months without any income while you complete the work. A general rule is to spread the payments out if a project takes more than three or four weeks.
Getting paid throughout a project also makes it easier to hold the client accountable if they don’t have the money to pay you for your work. If a client doesn’t pay you on schedule, you have the option to stop working so you don’t waste any more of your time.
Payment on completion is another type of payment schedule, and it means the client pays you when you finish the project. It doesn't mean they pay you when they give it their stamp of approval. If you have to wait for a thumbs up from the client, you could be waiting an indefinite amount of time for payment.
Remember, the client is paying you for your time spent working and not what they see as the final product. Your contract should specify an invoice schedule, setting out when you, the contractor, will invoice the client. Otherwise, you might find yourself in a situation where a client refuses to pay until you've made every minor revision they can think of on a whim.
If you agree to payment on completion, try to avoid having a Net30 or Net60 condition in your agreement. A Net30 condition means the client has 30 days to pay after you send them the final invoice (Net60 means they have 60 days). These conditions delay payment even longer, and that’s not always realistic for a freelancer.
Deposits (or retainers) are often a necessary strategy for freelancers needing to pay their bills. Breaking up the payments makes it feel like you have a steady income rather than having large sums of money come in at once.
Deposits also give you some protection from clients who can’t or won’t pay you. If they back out of your agreement, you’ll at least have a portion of the money they agreed to pay you for your time. It’s also a way to tell if a client is reliable. If they don’t want to pay a deposit, that’s a red flag, and you might be better off not working with them at all.
The amount you'll want to charge upfront depends on the type of freelancing you're doing and the size of the project. Most deposits are a percentage of your quote. Freelancers will generally ask for 10 to 50% upfront.
There are plenty of legitimate freelancing platforms for freelancers to choose from. You’ll just have to decide if they’re right for you.
Freelancing websites are generally easy and convenient to navigate. They're an excellent place to start looking for clients if you're inexperienced because they connect you with people all over the world and present a diverse selection of projects.
The reputable websites have restrictions in place to prevent scammers as best they can. They’ll also usually have a rating system so you can easily see if someone has a history of being a trustworthy client who pays on time.
These websites usually allow you to sign up for free and only take a percentage of your commission. This is a nice perk if you aren't in a position to spend money just to find out if you're a fit for a particular freelancing platform.
Freelancing websites can also make it easier for new freelancers who are unfamiliar with the importance of service agreements. These websites automate the contracts everytime a freelancer is hired, therefore neither the freelancer nor employer have to spend hours creating a contract for the work. However, you should ensure you read the website’s service contract terms before you begin working on the site.
In addition, some freelance websites require the employer to pay the contract fee into an escrow account once the contract is signed. This way, the freelancer can be assured the employer has the funds to pay for the project and that they won’t be left unpaid for work delivered. If any issues do occur, freelancing websites also have support teams to help resolve the conflict and make sure the freelancer receives the payment they are owed.
Freelancing platforms have some downsides as well. There's a lot of competition for jobs on these sites. This is especially true with inexperienced freelancers willing to work for small sums of money while they build their resume and portfolio. Freelancers who bid low on projects can be more attractive to hirers. Some clients will also lowball inexperienced freelancers who are desperate for work, leading to working many hours for very little pay.
Another aspect to keep in mind is that even though all these customers are coming to the same place to find freelancers, they also live in different markets. People from different parts of the world might have varying opinions on how much the work is worth. If you’re bidding on a job for a customer who lives in a country that has many people with your skillset, they will likely not pay as much as someone from a country where your skills are rarer.
The percentage of commission the websites take can also turn off some freelancers. Many freelancing websites will take 10% to 20% of the money you earn from clients. Some will even take their cut once you’ve come to an agreement with a client rather than waiting until the client pays you at the end of the project. Fronting the money isn’t always an option for freelancers.
Since the majority of freelancing websites use standard fixed or hourly rate contracts, you’re often restricted in what additional clauses you can add to your Service Agreement. You’re also forced to adhere to the freelancing website’s clauses around intellectual property rights, confidentiality and termination of contracts. If you want a more personalized contract, you likely will not be a fan of freelancing websites.
There are many freelancing sites for you to choose from. Although there are a lot of similarities between the most popular sites, they have varying rates and can sometimes target freelancers working in specific fields. Some of the top freelancing websites include:
There are advantages to bypassing freelance websites and finding clients on your own. Avoiding these websites also means no signup charges, monthly fees, or deductions on your compensation.
The best way to find clients on your own is through word-of-mouth or online reviews. A reference from a satisfied customer carries more weight than a polished resume ever could. However, also have your resume and portfolio up to date, and post your most recent work on LinkedIn because that’s where many potential clients will come looking for you.
Effective marketing can also go a long way towards finding jobs as well. If people see your quality work on a regular basis, they can perceive their familiarity with you as credibility. Have a consistent social media presence so customers can see your work and know where to find you.
If you decide to find your own clients, creating a Freelance Contract (also known as an Independent Contractor Agreement) can lead to a more in-depth agreement designed with specific clauses to meet your own needs and needs of your client rather than a one-size-fits-all contract a freelancing website might make you use.
Every freelancer should have an understanding of how contracts work. Having a written Independent Contractor Agreement or Service Agreement to reference during and after completing a project ensures that everyone is on the same page and clearly understands the terms and services.
More importantly, a contract acts as evidence that an agreement between you and the client exists, which is important if a dispute arises.
For example, suppose you spend a few weeks of your limited time on a project only to have the customer stop returning your phone calls. In that case, your contact is proof that they agreed to compensate you for the time you spent working.
Creating a detailed contract is also essential for avoiding disputes down the road. Some clients might claim that the product or service you provided doesn't align with the original plan once the work is complete. They can then use it as an excuse not to pay you or request countless modifications. A contract that outlines the scope of work can eliminate a court battle that is your word against theirs.
It's nearly impossible to create a contract with too much detail. There are some essential clauses you'll want to include in most agreements you sign:
The Copyright Act of 1976 governs copyright and ownership laws. Most experienced freelancers will advise newcomers to brush up on their understanding of intellectual property laws before signing a contract. The last thing anyone wants is to accidentally give away their ownership rights to the world’s next “big idea.”
Consider contract archiving as a better-safe-than-sorry approach to looking after yourself and your documents.
Many freelancers are moving away from email and spreadsheets. Instead, they’re using Freelancer Management Systems (FMS) to centralize their data relating to clients, invoices, scheduling, and tax receipts.
Backing up and securing your data is a great way to prevent theft, computer malfunctions, and other security threats from having devastating consequences to your business. If you lose your files for any reason, you’ll have everything saved where they’re available to be restored.
Most states in America even have data protection laws that you need to follow because you aren't just storing your data. In some cases, you're collecting sensitive information about your clients as well. You are responsible for securing the private data customers trust you with.
Having an organized archive of your documents can also be valuable if you ever go through an audit. You wouldn't be the first to get overzealous when deleting files only to find out years later you deleted a document you legally should have kept.
Contract archiving also provides increased security for you. By backing up all your files and having them stored in an offsite database, you reduce the chances of cyberattacks having devastating consequences if your laptop is ever hacked or stolen.
There may be situations where a standard Independent Contractor Agreement isn't comprehensive enough for a job, and additional documents are necessary. In most cases, the client will likely be requesting you to sign documents that provide added security to a working relationship.
Non-Disclosure Agreements (NDAs) prevent the parties in a business relationship from sharing confidential information they are privy to while working together with outsiders.
It's common for companies who hire freelancers to insist on signing an NDA, so their sensitive information doesn't leak to competitors.
An intellectual property clause is a section in your contract that assigns ownership of any “creations of the mind” that stem from a project. This includes inventions, designs, symbols, images, and artistic and literary works.
As the creator of the work, you will have ownership of it. You can create a clause in your agreement that specifies which parts of your work a client can use or own.
There are situations when it’s appropriate to give the client the full rights to your work. However, make sure you understand how to protect your intellectual property before doing so.
A Non-Compete Agreement forms when an employee agrees in writing to not enter into competition with their employer if they leave the company. These agreements often have time and geographical limits so the employee isn’t left with no one to work for.
For a freelancer, this usually means agreeing not to work for a competitor of your current client. It's unlikely that you will ever ask a client to sign a Non-Compete Agreement. However, you should be familiar with them because some clients might ask you to sign one. Knowing whether the terms and restrictions are fair to you might save you some major headaches later.
Consulting Agreements are used by consultants to outline the terms of a given service with a client. For a freelancer providing consultation to a client, the agreement is an alternative to an Independent Contractor Agreement that outlines the scope of work, compensation, materials, and confidentiality.
Outside of actually finding work, taking care of your finances is one of the most important parts of freelancing.
You’re expected to pay taxes on your income. An employer is obliged to deduct taxes from an employee’s pay, but it’s a freelancer’s job to calculate, collect and pay their own taxes. It comes with a lot of responsibility because getting it wrong can cost you in the end.
The Internal Revenue Service (IRS) regularly updates its tax laws. Consider hiring an accountant or Certified Professional Accountant (CPA) to handle your finances. They'll have a better grasp of the tasks you're required to complete when filing your taxes.
If you're going to handle your taxes on your own, it's recommended that you update your finances daily. This means updating income and expenditures as they come in. Even if your operation feels small-time to you, it's still a business as far as the IRS is concerned.
As the saying goes - there are two guarantees in life, and taxes is one of them.
Federal, state, and local governments will impose taxes on your earnings. So learning the requirements of each level will make your experience as a freelancer easier in the long run.
Every person earning money is expected to pay federal income taxes. The amount you’ll owe as an individual in federal income tax depends on the tax bracket you fall under (based on income earned) and if you’re filing your taxes with a spouse.
However, many freelancers are surprised to learn that they’re also required to pay a 15.3% self-employment tax if they earn more than $400 from a single client. The purpose of this tax is to contribute towards Medicare and Social Security just like regular employees.
A study by Tax Foundation found that Americans paid an average of 10.3% in state and local taxes in 2019, with New York (14.1%), Connecticut (12.8%), and Hawaii (12.7%) having the highest and Alaska (5.8%), Wyoming (7%), and Tennessee (7%) having the lowest.
Most states charge freelancers and businesses income tax. The exceptions being Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you’re working in any of those nine states, you don’t have to pay income taxes at the state level.
Some locations in America will also have local income and business taxes. Check with your local government to see if these taxes apply to you.
You'll need to charge the customer a sales tax if you're selling goods in the US. "Goods" are products that clients can physically hold or touch.
There isn’t a federal sales tax in the US, but every state, except Alaska, Delaware, Montana, New Hampshire, and Oregon, has a sales tax. Only Hawaii, New Mexico, South Dakota, and West Virginia require charging a sales tax on services.
If a transaction with a client requires charging a sales tax, the freelancer collects the tax from the client and then reports it when they file their taxes.
Sales taxes also typically only apply to transactions made within a state. You likely won't have to charge a sales tax if you ship the goods to a client in another state, but it's a good idea to double-check your state laws before making any assumptions.
In 2020, California (7.25%) had the highest sales tax, while Indiana, Mississippi, Rhode Island, and Tennessee had the second highest at 7%. Colorado had the lowest sales tax of the non-zero states at 2.9%.
If you think you’ll owe more than $1,000 in taxes at the end of the year, you’re expected to pay taxes quarterly. It’s a good idea to have an accurate estimate of the amount of quarterly taxes you’ll have to pay. If your payments are inaccurate, you’ll have to pay the remaining balance to the Internal Revenue Service (IRS) all at once when you file your annual tax return.
Estimated tax payments for the year are generally due on:
It's recommended that freelancers set aside 25 to 30% of their taxable income, but keep in mind that you likely won't need to pay that much after your deductions. One way to calculate your estimated tax payment is to use an IRS Form 1040-ES.
Once you understand how much income you're likely to earn in a year, you can estimate how much 25 to 30% will be for you so you can prepare accordingly.
In the meantime, you can use the information in your previous 1099-MISC or 1099-NEC forms to estimate what you'll earn in the upcoming year.
As a freelancer, you can deduct the cost of business expenses from your gross earnings to lower your taxable income. Some standard deductions for freelancers include:
Remember to not go overboard with deductions. They need to be necessary to your business for it to be a deductible at tax time.
Filing taxes in the US doesn't have to be a painful experience.
The government considers you and your business one entity, so you file your taxes for each together. You'll list all your income and deductible expenses with a Schedule C (Form 1040). It's also called a "Profit or Loss From Business" form.
You'll need a 1099-MISC form from every client who pays you $600 or more in place of a single W-2 form you'd get annually from a traditional employer. Even if the client doesn't give you the form, you're responsible for reporting all your income for the year. This includes cash payments. You'll report your 1099-MISC income on your Schedule C.
It's recommended that freelancers use a professional rather than TurboTax or tax services (H&R Block) to file their taxes. Freelancers who earn less than $72,000 in a year can also use the IRS Free File.
The amount of data that freelancers need to keep track of can sometimes feel overwhelming, but having a system to stay organized goes a long way in relieving stress and mistakes.
Many freelancers use platforms like Google Sheets, Quickbooks, Zipbooks, and Bill.com to organize their data and finances.
Factors you might want to track include:
There are a few odds and ends you’ll want to be aware of before taking on projects as a freelancer.
Turning down or ending a project can be an awkward position to find yourself in, and not accepting work likely goes against your instincts. However, sometimes things don’t work out, and you’re unable to take on a job. Ideally, you’ll pass on the project without burning a bridge with the client.
Having a positive exit strategy is vital. Be as polite, professional, and helpful as reasonably possible. Doing so helps maintain a good relationship with the client and keeps the door open for collaboration in the future.
Honesty can go a long way. Be upfront about your skills if you’re not confident you can do the job. If you don’t have room in your schedule for another project, consider referring the client to another freelancer you trust. If the client has their heart set on working with you, propose an alternate solution or different time frame to complete the job.
As far as legislation goes, workplace laws protect employees much more than freelancers.
The Copyright Act of 1976 protects ownership, and you can put clauses in your Independent Contractor Agreement to ensure you get compensation, but you also don’t have a guaranteed minimum wage, and there isn’t much protecting freelancers from workplace discrimination.
Here are workplace laws that don’t apply to freelancers:
This is another instance where freelancing platforms are helpful. Many websites have statements declaring they don't allow discrimination, and doing so will result in banishment. However, filing a complaint with the website will likely require contacting its support center, and they aren't always the most helpful.
Also, keep in mind that just because you're a freelancer, that doesn't mean a client has free reign to do whatever they want to you. If the discrimination is deemed a criminal activity, you can take legal action.
Even if the law doesn't protect freelancers the way it does employees, there are ways you can help yourself. First and foremost, a detailed contract with clauses that provide a legal way of exiting the agreement if the client discriminates or abuses you is a must. You never know how a relationship with a client will play out, and it's always better to have your bases covered.
The Freelancers Union also offers free memberships. Once you’re a member, you’ll have access to benefits, financial tools, and legal resources.
You can do yourself a favor by taking out various types of insurance too:
Freelancing comes with a lot of freedoms and advantages. The key is to stay professional and organized. You need to look after yourself because no one else is going to do it for you.
You’ll be just fine as a freelancer if you do the proper research to know how much your time is worth, file your finances and client information securely, know your rights, and maintain good relationships with your clients.
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