We'll start at the beginning: the paperwork you fill out when onboarding with a new client in preparation for your self employment tax. While staffed employees fill out a W-2 tax form, that's not the case for us. As an independent contractor, we get a 1099 instead.
There are many differences between an employee and an independent contractor. From a tax perspective, the primary difference between 1099 income and W2 income is that 1099 income must pay their own taxes that are normally withheld by an employer automatically when they pay a W2 employee a salary.
This is the biggest reason why many freelancers struggle to manage their tax obligations on their own because at a normal "job" the taxes are automatically taken care of by the employer's payroll provider when a W2 wage is paid.
Because of this extra financial burden, it's common for freelancers and other self-employed individuals to leverage software, accounting solutions, and tax accountants to help them manage their tax obligations. This is also why it's commonly understood that freelancers must set aside money for taxes every year.
If you've ever been a full-time or part-time employee at a company, you've filled out a W-2 form.
In this situation, I have to say: taxes are simpler. Money is automatically withheld from each paycheck and set aside for tax purposes. Not only that, but your employer actually pays half of your Social Security and Medicare contributions (ka-ching!). All you have to worry about is filing your personal income taxes each April.
But we're not here because we want to be salaried employees, are we? We're here because we want to break out into the wild world of freelancing and entrepreneurship. It's exciting, sure, but it's also a little more complicated when it comes to taxes.
When you take on an assignment as an independent contractor that pays $600 or more, you'll need to fill out a 1099. Before 2021, most freelancers filled out a 1099-MISC. The 1099-NEC now is used for non-employee compensation.
First of all, remember: when you work for yourself, you're a business. You may be a company of one, but you're a company nonetheless. And as a solo operation, you act as both the employer and the employee. That means there's only one person around to withhold the money for all those various government taxes and contributions: you. And you need to make sure you pay those taxes on time.
Speaking of payments, there are two things to keep in mind when you make the move to 1099. First: in addition to personal income tax, you're required to pay self-employment tax. Second: you'll most likely need to start making quarterly estimated payments.
Before your head starts spinning, let's stop and break these all down.
1099 Income is a self-employed independent contractor income.
W2 Income is an employee's income with a regular wage, benefits, and employer-withheld taxes.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?