Freelance Web Developer Manual

Setting Up Your Business

A project of Frontntweaks.com
Author: Gerald Watanabe

Things you need to do!

 

Congratulations, you must have decided to give freelancing a go!
I am sure you are confident about your technical skills to build awesome websites.
Whether you are new or have been doing this on the side for a few years, you finally realized this is the time to open the doors of your business.

The State of the Remote Job Marketplace report from FlexJobs says there are now 3.9 million Americans or 2.9% of the total US workforce who work from home at least half the time. [Small Business Trends][1]

In this chapter, I’m going to share the not so fun part of operating a freelance business.
You may already be aware of these things, but there may be others who are totally clueless.
These tips are just guidelines, as you will have to do your own research, as different states will have their own rules and regulations pertaining to operating a small business.

Register Your Domain Name

 

“If you want an online presence for your business, start by registering a domain name — also known as your website address, or URL.”
“Once you register your domain name, no one else can use it for as long as you continue to own it. It’s a good way to protect your brand presence online.” [SBA.gov][2]

Basically, every business has a name.
And if you plan to launch your freelance business, you need a domain name.
I am sure everyone has already been thinking about naming their business, and how your business name will fit into the domain. If you are building websites, it is a no brainer that you need a website and people want to see it.

According to the Small Business Administration: Small Business Administration (SBA), obtaining a domain name is one of the four ways you can register your business.

A few tips:
1) The domain does not have to be the exact name of your business but should be similar.
Example:
Your business name – John Smith Web
Domain examples – johnsmithweb.com, jsweb.com, jsmithweb.com, etc.

If you are targeting a specific location, you may want to add the town, city or state name:
pacificsolutions.com, Nevada.design, haywardweb.com as examples.

2) Extension: .com is the most popular and easy for people to remember, but there are some many others that you can choose.
Examples: .design, .agency, .tech, .codes, .website and lots more.

3) Keep it as short and simple as possible:

  • Easier to remember.
  • Less change of typos.
  • People hate typing long URLs.

4) Check if the domain name is available.
There are many resources available on the internet to verify the availability of a domain name.
I also suggest you do a Google search to see if your business name is not Trademarked or Copyrighted by someone else.
This simple task can save you from potential embarrassment later.

5) Optional
Some experts suggest purchasing other domain names similar to yours, or domains with different extensions if you can afford it.
Examples:
johnsmithweb.com
johnsmithweb.net
johnsmithweb.design
johnsmithweb.io
Etc.

Reasons:

  • Eliminates competing or clashing with another business with the same domain name (i.e. johnsmithweb.biz).
  • Potential clients confusing you with that other site with the same name.
  • If your business is very successful, prevent scammers from building fake websites to draw visitors to their sites (using another extension).

If you do purchase additional domains, remember to have them redirected to your main domain.
So even if visitors use the wrong domain, it will still redirect them to the correct domain (website).

Tax Responsibilites

 

As a freelance business, you are required to pay both Federal and State agencies each quarter.
This is one of the things most would be freelancers dread.
But is required and further distinguishes you as a legitimate business.

I have a tax professional handle my tax affairs because I really don’t have the time to be worried about things like this. If you’re like me, I strongly suggest that you connect with someone to handle your taxes so you can focus on your clients.

The information provided in this chapter is basic tax knowledge that every freelancer should know about.
I am no authority myself, so for a more comprehensive study, links are provided for those interested in pursuing this subject further.

Get federal and state tax ID numbers

Your state tax ID and federal tax ID numbers — also known as an Employer Identification Number (EIN) — work like a personal social security number, but for your business. They let your small business pay state and federal taxes.[SBA Get federal and state tax ID numbers][3]

 

Tax Basics for Freelancers

Here are the basics tax information you should be aware of.
You can take a deeper dive into the links I have posted for each topic.
Whenever you are confused or have questions, always consult a tax professional, as they will be your best friend during the tax season.
 

Self-Employment Tax

If you earn $400 or more from freelance work in any given year, you are responsible for paying the self-employment tax of 15.3%. This tax solely exists to cover your Social Security and Medicare taxes. [Freelance Taxes 101][4]

 

Chart: The Minimum Freelancers Need To Earn To File Income Taxes [FreeLanceTaxation] [5]
 

Complete a W-9 Form When You Get a New Client

When you ink an agreement or start work with a new client, it’s likely they will ask you to complete IRS Form W-9. [SBA Starting A Freelance Business] [6]

 

Estimated Taxes

According to the IRS, you should pay taxes quarterly if you expect to owe at least $1,000 in taxes this year. If you rely on freelance work for most or all of your income throughout the year, you are likely responsible for estimated tax payments. [Freelance Taxes 101][4]

 

Schedule C Tax Form

A Schedule C tax form serves as the hub for all of your freelance income and expenses. First, you’ll report all the freelance income you earned during the tax year in Part I. This includes amounts already reported on the 1099 forms you received from clients and amounts not yet reported for the clients who didn’t send a 1099. [Freelance Taxes 101][4]

 

Freelance Tax Deductions

As a freelancer, you can claim deductions on expenses that, according to the IRS, are “ordinary and necessary” for the operation of your business. But always keep in mind that when it comes to deducting expenses from your side hustle, you can’t mix business with pleasure! Your business expenses must be used exclusively for freelance work; [Freelance Taxes 101][4]

 

Sales Tax Permit

If you intend to sell taxable goods or services (online or offline), you may be required to collect state and local sales taxes from your customers. If you sell your products in a state that charges a sales tax or levies a gross receipts or excise tax on businesses, you may have to apply for a tax permit or otherwise register with your state revenue agency. [SBA Run a Home-Based Business?] [7]

Bottom Line:

Consult a tax professional

Bookkeeping

 

How can you keep track of all your business transactions?
As a solo freelance business owner, who has the time to handle all the necessary bookkeeping tasks.
Don’t fall into the trap of leaving everything on the side hoping to organize things later.
Guess what, you are already busy and depending on how many clients you have, you may never have the time to organize everything.
When you do attempt to sort everything out, you may have forgotten what is what, which leads to stress and frustration.
Not a good scenario to be in.

The goal is to hand over all your required paperwork in a neat and organized package so your tax preparer can submit a tax return to your advantage.

Accounting Software

Thank goodness for accounting software.
When you first start out in your business, you may only have a handful of clients allowing you to get away with manually organizing your data.
What happens if your business grows, trying to keep track of invoicing, bank feeds, payment reminders, and tax preparation can turn into a nightmare, especially if you are not gifted in organizing things manually.

Free Online Accounting
Wave – No trials, no catches, and no limits. Accounting, invoicing and receipt tracking software so you can better understand your business finances, for free.

Recommended Full-Featured Online Accounting
FreshBooks Cloud Acounting
FreshBooks self-employed accounting software makes working for yourself painless by making your accounting a breeze. Spend less time on accounting and you’ll have more time to follow your passion.

QuickBooks
We don’t expect you to be an accounting expert. That’s why QuickBooks keeps everything organized in one place. And, if you have an accountant, share your books for seamless collaboration.

ZohoBooks
Accounting software that manages your finances, gets you tax ready, automates business workflows, and helps you work collectively across departments.

There are actually quite a few other accounting software available.
You may want to do more research on your own to find one that best fits your needs.
The accounting software that I mentioned above are very popular and do the job very well.

Keep in mind that Wave, the free accounting software will have limitations because it is free.
However, if you are just starting out it may be the perfect tool that helps get you started.

Registering A Business Entity

 

Your location and business structure determine how you’ll need to register your business. Determine those factors first, and registration becomes very straightforward.
For most small businesses, registering your business is as simple as registering your business name with state and local governments.
In some cases, you don’t need to register at all. If you conduct business as yourself using your legal name, you won’t need to register anywhere. But remember, if you don’t register your business, you could miss out on personal liability protection, legal benefits, and tax benefits. [SBA Register Your Business] [8]

Do I need to register my business?
Short answer: No
Possible reasons:

  • Just starting out, no real steady income flow yet.
  • What are your prospects of being sued?
  • Your passion to build websites is just a Side Hustle to earn extra pocket money

Advantages of Registering a Legal Entity
Once your freelance business gains traction and begins to roll, you should really consider Choosing a Legal Entity.

  1. Your personal assets are protected if you get sued.
  2. Depending on your setup, you could save on taxes.
  3. Gives your business more credibility.
  4. To work with major clients: they usually prefer to work with those who are registered corporations and LLCs.

 

When should I consider registering my business?

Here are some key signs:

  • Your business has grown, generating more income.
  • Business loans: lenders prefer working with corporations and LLCs.
  • You want to land a contract with a enterprise level company.
  • Ready to hire others to join your business.

These are just some of the basic reasons you should really consider choosing a legal entity for your business.
It’s for your protection, as working with more clients and larger companies opens up the possibility of receiving a surprise lawsuit.
In addition, hiring employees raises the opportunity for liability issues.

But the best reason are the tax benefits:

Long story short, Congress has tried to level the playing field by cutting corporate taxes for C-corps, and giving pass-through entities like S-corps, LLCs, and sole proprietorships a large deduction. [How to Set Up a Business Entity as a Freelancer: Fundera] [9]

 

Choosing A Legal Entity (freelancer)

The following content is strictly for informational purposes.
If you are seriously considering registering your business as a legal entity, I suggest you consult someone well versed in this subject matter such as an attorney or tax professional.
 

Business Structures for freelancers:

Sole proprietorship
Most freelancers begin with this basic model.
The good:

  • Simple and low cost.
  • No seperate business tax return (individual and business the same).
  • Can operate under owners name or a trade name.

The Bad:

  • No seperation between owner and business: you can be sued for your personal assets.
  • More difficult to borrow money from lenders.

 

LLCs, S-Corps, and C-Corps
Much safer alternatives that have an advantage of protecting your personal assets.
In addition, a single owner with no employees can set up a single member LLC or
single person Corporation.

The Good:

  • Protected from personal liability for a company’s debts.
  • Greater credibility with: Banks, vendors, and prospective clients.
    • LLC: no US citzen requirements.
    • LLC: less paper work to setup and maintain (compared to S/C Corp).
    • S Corp: avoids double taxation on gains.
    • C Corp: removes limits of S Corp: (unlimited shareholders, removes US Citzen or US Resident requirement).

The Bad:

  • More expensive than sole proprietorship.
    • LLC: limited liability protection.
    • LLC: won’t receive tax benefits of a S Corp.
    • S Corp: limits on business (limits shareholders, must be US Citzen or US Resident).
    • C Corp: double taxation.

 

For a more detailed comparison of the different business entities:
Internet Legal Research Group [10]
 

How to Setup a Business Entity

Follow the guidelines in this article: How to Set Up a Business Entity as a Freelancer.
Scroll to the bottom of the page: How to Set Up a Business Entity as Freelancer: Step-by-Step Instructions.[9]

Forming an LLC – Key Documents You’ll Need to File and Create. [SBA Forming an LLC] [11]

The information on Business Entities is for informational purposes.
As each freelance business has its own unique requirements, please consult an attorney or tax professional for your freelance endeavors.

Employer Identification Number (EIN)

 

An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number, and is used to identify a business entity. Generally, businesses need an EIN. You may apply for an EIN in various ways, and now you may apply online. This is a free service offered by the Internal Revenue Service and you can get your EIN immediately. You must check with your state to make sure you need a state number or charter.[IRS Employer ID Numbers] [12]

Although an EIN is required for corporations, it is recommended that every business entity including LLCs and Sole Proprietorships obtain one for the following reasons:

  • Reduces your privacy & personal risk.
  • Prevent identity theft: as you won’t have to provide your SSN to clients.
  • Shows you are an independent contractor.
  • It’s free to register.
  • Easy to register online.

 

Apply for an Employer Identification Number (EIN) Online

Open a Business Bank Account

 

This is an often overlooked, but critical step that most new Entrepreneur’s miss when they launch their freelance business.
A separate business bank account should be implemented before you receive your first client’s payment, for you could be opening yourself to personal liability if someone sues you.
This action can help protect your personal account as long as you have set up an LLC business entity.

Having a separate business account also gives you a more professional look, as you receive or make payments using your business name.

How about registering as a DBA?

A company is DBA (or “doing business as”) when they operate under a name that is different from their legal name. Filing for a DBA allows you to do business under a name other than yours, or the name under which your business is legally registered.[What Is DBA (Doing Business As) and When to File One: Fundera] [13]

One reason to open a DBA is that some banks require you to have a minimum of $10,000 in a business account, which may not be suitable for a young business.

Basically, a DBA allows you to conduct business under a different name then your personal or business name.
So how does this benefit you?

SOLE PROPRIETORSHIPS
Normally a sole proprietor conducts business under their personal name.
With a DBA you could receive payment using your business name instead of your personal name.
 

LLCs

And although a DBA doesn’t provide you with legal protections in itself, it does further separate you from your business. In the unlikely scenario that your business is sued, for instance, you could offer up your DBA as evidence that your business and its assets are an entity separate from you and your assets.[What Is DBA (Doing Business As) and When to File One: Fundera] [13]

 

How to Obtain a DBA?

Every state has different requirements.
Here is a great online resource: How To File A DBA [14]

Business Insurance

 

As a freelancer, liability insurance can mean protection against paying tens of thousands of dollars in damages to a client — whether or not it was your fault. Plus, many contracts require that freelancers have liability insurance, so it’s always a smart thing to have. [Everything freelancers need to know about liability insurance: FreeLancersUnion.org] [15]

 

Every freelancer who is starting out most likely never ever thought about securing any kind of insurance for their business. I was myself didn’t know that there was insurance for solo freelancers, and thought of being sued never entered my mind.

But after reading horror stories about freelance web designers getting sued, red flags quickly went up.
In many cases, it really wasn’t the web designers fault:

  • Server went down, client lost business.
  • Website was hacked, the client failed to perform updates (theme & plugins), still blamed the developer.
  • Website breaks for some reason.

Even if wasn’t your fault, the stress of going to court, attorney fees, and sleepless nights are not worth it.
Having Professional Liability insurance can give some peace of mind as it should cover all these expenses.

Analogy Example: Auto Insurance
Even if auto insurance was not required (currently mandatory in every state except New Hampshire), would you leave your garage without some kind of coverage? You just never know what can happen, because no one plans on being involved in any kind of incident.

I look at having business insurance in the same way, especially when dealing with clients who depend on their websites for business. You can put your best effort into building and maintaining a secured website.
But you have no control over the host server, the client using simple passwords (even when warning them), or third-party plugin developers who fail to provide proper updates.

You may get away with insurance in the beginning, but as your freelance business gains traction and really makes great strides, I would highly recommend you consider obtaining General Liability Insurance, for three reasons:

1) You may not qualify
Some potential clients have a requirement to hire only freelancers who have some kind of Liability Insurance coverage.
If you do not have the required coverage, you are not even considered for the job.
These are usually the bigger money projects, so it is something to consider.

2) Peace of Mind
You can confidently look for more projects and clients.

3) Gives your brand a more professional character
Every legitimate business has insurance.
It also shows that you are serious and want to protect both the customer and your business.
 

What kind of insurance should a freelancer have?

Types of insurance freelancers may consider:

1) General Liability – protects a company’s assets and pays for obligations, liability, etc.
You can read more at this link: SBA – General Liability Insurance [16]

2) Professional Liability – Known as Errors and Omissions insurance; when your client claims your negligence caused financial losses related to professional services.
You can read more at this link: Insureon [17]

Contact your personal insurance carrier as they should be able to provide the insurance that best fits your needs.
They may also offer package deals, such as having General Liability, Professional Liability, and Property Insurance bundled together at a discount rate.

Be Safe and Not Sorry!

References

1. 3.9 Million Americans – including freelancers, No Work From Home At Least Half the Week: Small Business Trends

2. Choose your business name: “SBA.gov”

3. Get federal and state tax ID numbers: SBA.gov

4. How to Calculate and Make Estimated Tax Payments: SDA.gov Caron_Beesley, Contributor.

4. Freelance Taxes 101: Dave Ramsey

5. The Minimum Freelancers Need To Earn To File Income Taxes: FreeLanceTaxation Susan Lee, EA, CFP

6. Starting a Freelance Business – How to Take Care of Legal, Tax and Contractual Paperwork. [SBA.gov] By Caron_Beesley, Contributor.

7. Run a Home-Based Business? – Find the Licenses and Permits You Need. [SBA.gov] By Caron_Beesley, Contributor.

8. Register Your Business: SBA.gov

9. How to Set Up a Business Entity as a Freelancer. Fundera – Priyanka Prakash

10. Business Entity Comparison Chart: Internet Legal Research Group

11. Forming an LLC – Key Documents You’ll Need to File and Create. SBA.gov By Caron Beesley, Contributor.

12. IRS Employer ID Numbers. irs.gov

13. What Is DBA (Doing Business As) and When to File One. Fundera Georgia McIntyre

14. How To File A DBA. Startupsavan.com

15. Everything freelancers need to know about liability insurance. FreeLancersUnion

16. General Business Liability Insurance – How it Works and What Coverage is Right for You. SBA.gov By Caron_Beesley, Contributor.

17. Professional Liability Insurance. Insureon

Note: If you find broken reference links, please contact me.
Thank you so much.

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