Whether you’re new to freelancing and consulting or whether you’re in between jobs and searching for different opportunities, you’re in a perfect position to empower yourself with financial freedom and flexibility. Working for yourself can lead to many great opportunities.
Yet, there are huge challenges involved with freelancing too. You need to manage major responsibilities while having a business mindset and the ability to look after your contracts. It’s important you always do your best to get a contract in place before you start a new project and if you’re in America, it is a legal requirement to have one in some states, such as New York. Even if you’re in a location where a contract isn’t required by law, we advise that you have one because it will help clarify expectations for a smoother working engagement.
In a recent report by freelancing hub Upwork, it was discovered that between 2013-2018, the freelance workforce grew by 3.7 million people, reaching a total of nearly 57 million people who take on a freelance contract every year in the US – and by %, countries like the UK aren’t far behind either! While the ‘true’ number of freelancers forms the basis of heated debates, the key message of Upwork’s research can’t be ignored, that message is: the world is going freelance.
With so many freelancers around the world all competing for work, it’s easy to become all consumed by focusing on pitching for new work. After all, it’s the work that brings you the flexibility and financial freedom that makes freelancing so attractive.
But regardless of how busy you are, understanding the sorts of freelancing contracts you may be offered will help you along this journey and guarantee you get paid. This blog post simply breaks down the 5 most popular freelancing contracts and tells you everything else you may need to consider, such as your rights and tax classification!
1) A Letter of Agreement (LOA) E.G —The informal contract
A Letter of Agreement also referred to as simply an LAO, is the most informal version of a contract and as the name states, it’s usually provided in a typed-out letter or an email. While most LOA’s ask for two signatures, one from the freelancer and one from the client, as a way to protect everyone involved – we would advise to only start a project following a LOA if you have a lot of trust in place with your client, as this type of contract might not stand up in court.
An advantage of an LOA is that either party can create them which makes the process quicker. However, all LOA’s should feature certain criteria to make sure freelancers are protected and these are services that will be provided, services that won’t be provided, costs, clause breaks, delivery terms, payment terms, and any other business.
2) The NDA
An NDA (nondisclosure agreement) is usually a contract a freelancer will sign before any work has started, it may or may not include details of work, or it may be given to freelance before any agreements are ready.
In North America and in the UK, NDAs are a catch-all term for agreements that include confidentiality clauses or as they are sometimes more casually known as a ‘gagging clause’. If you sign an NDA then it is likely you will never be able to talk about the work you are completing.
Some NDAs are reached between freelancers and contractors after the relationship is terminated but this is only in very special circumstances.
If you are signing NDAs, then it’s generally advised you get your own legal advice first but this depends on how much the contract is worth. If you can’t afford legal advice, then take care while reading through the NDA and making sure you’re happy with everything. We imagine that you do not want legal exposure around work agreements hanging over you for all your career.
3) Non-compete Agreement (NCA)
If you are about to accept a contract for an agency, then you may need to sign a non-compete agreement (NCA) which ensures that you won’t pitch for work with the clients of your client. Most NCA contracts will ask you to give anyway rights to ‘compete’ with your client in any form and there are lots of stipulations that this could include.
As a freelancer, you should consider hiring someone who can fully vet an agreement like this, to ensure you won’t lose out on any future business opportunities. Specifically, you should consider the time limit that you’re restricted to on an NCA if it’s indefinite – then that may not be appropriate for you.
4) A Formal Freelancing Contract
A formal contract in a freelancing situation or otherwise is an employment document that has been checked by a lawyer at some point in its journey – we say this because some businesses will re-use blanket contracts. These contracts should be provided to the freelancer by a client, but the client has the right to read it over before any work starts and put forward any changes they might want.
In a formal freelancing contract, your freelancing work becomes transactions that are governed by the law of your state or country and therefore if you or your client breaks any part of an agreement, the law could be used to resolve any dispute.
5) Statement of Work (SOW)
Simply put, an SOW is a written contract or email, between you and your client that lays out all the specific work you will undertake for them.
An SOW might be signed before a formal contract as a project plan, or it may be a complete replacement of any other contract.
Depending on how the contract was formed, as many SOWs are created quickly over email, it may not hold up in any formal legal debate.
If you’ve to freelance, then these types of contract are important because you have to protect yourself from any disagreements which could negatively impact on your financial freedom. If you’re reading this and think that you need more help before you can have a lucrative freelancing career, read this guide which inspires ways to make money while freelancing.
So, if ensuring you have a legally tight contract that you and your client are happy with, is the best way to get started, what is next? Well, it’s probably time for you to get working but you also need to make sure you’re up to date with all the aspects of freelancing that might impact your pay, we’ve listed the two most important points below.
What payment terms are you legally required to be asking for?
If you live in America, then because of the Fair Labor Standards Act, a freelancer is not classified as an employee. This means that it’s up to you to set the bar for payment and there is no legal requirement for you to be paid minimum wage or have any of the other benefits that might be associated with full-time work. While the FLSA might not apply in other countries such as the UK, the general rule throughout most of the Western countries is the same – that it is up to you to decide the amount of money you ask for and the terms you want.
But, whatever money you do earn – you still have the responsibility to pay tax!
What are Your Tax Responsibilities?
In addition to the income tax that you must pay, in America freelancers also need to pay the self-employment tax which is 15.3%. This 15.3% covers Medicare and Social Security costs that full-time employees have taken out of their paychecks automatically by their employer.
Please note that this 15.3% also covers the employer portion of those taxes, if you’re freelancing in America then you are considered an employee and an employer – because of your self-employed status. If you’re in the UK then you need to be registered as a contractor and you’ll be required to pay income tax of 20% on all earnings above your personal allowance and below the upper limit of the basic rate, just like every other employer.
However, whatever country you’re in you should be considering registering your taxes in a way that reduces your liability to the lowest possible amount. As a freelancer or contractor, you will incur business expenses that a typical employee would not, and therefore you will be open to having tax deductions. However, these tax-free deductions can only be for purchased which are necessary for your work, e.g. taxis, meeting costs, wi-fi, the price of your laptop, etc.
There’s been a lot of information to take in throughout this blog but remember that if you do it right, freelancing can be much more fun and lucrative than a typical 9-5 job. But for your financial freedom to be achieved through freelancing, you will need to invest a lot of time and money.
You might need to work as much as you possibly can for a while but then, the sky really is the limit and, if you ever need any legal help – then there are many freelancing special legal experts out there such as the likes of Mackenzie and Dorman.