If you’ve recently transitioned from full-time employment to freelancing or contracting, one of the first things you need to get to grips with is self employment tax and social security.
When you worked for an employer, this was all relatively straightforward. Your employer would deduct social security taxes from your paycheck, match your contribution, then send the tax to the Internal Revenue Service (IRS). Simple.
But as a freelancer, the buck stops with you. In this post, we share some vital social security tips and tricks to make your life easier — both now and in the future.
Here are our top 5 social security tips & tricks for freelance workers.
To understand how your social security benefit is calculated, take a look at this information sheet from the SSA. In short, it’s based on your average monthly earnings, adjusted for inflation, and taken over your 35 highest-earning years.
At a minimum, you should aim to work for 35 years. If you work fewer than that, your benefit calculation will be smaller, which, in turn, reduces the size of your checks.
But if you manage to work longer than those 35 years, any low-earning years will be replaced by your higher-earning years. For example, if you’ve just started out in freelancing, you may have a few years of low income as you build your business, skills, and reputation. Ideally, you’ll want to work on longer to ensure those early years are disregarded in your social security calculations.
As an extension of tip #1, it’s clear that the more money you make during your 35 years, the higher your social security benefit when you retire.
For those employed by an employer, this can prove challenging, as they’re often left with the choice of either working overtime or taking on an extra job.
But as a freelancer, your earning potential is close to limitless. You can choose how much you charge, which services to offer, and continually upskill to compete in an ever-changing landscape.
Not sure how much you should be charging? Check out our freelance rates explorer.
As we mentioned at the start of the article, the buck stops with you as a freelancer when it comes to tax. You’re required to file an annual income tax return, and you need to pay your estimated tax bill every quarter.
And in addition to that, you also need to pay self-employment taxes, covering social security and Medicare — both of which are withheld from salaried employees by their employers.
Wage-earners also get help with their share of social security and Medicare. Their employers are legally obligated to contribute half. Unfortunately, as a freelancer, you’re on your own, which means it’s crucial that you’re disciplined with the money you earn, keeping enough aside to cover all of your tax.
You can read more on the IRS website.
When you start freelancing, you soon realize that you need to wear several hats on any given day.
Whether you’re primarily a web designer, copywriter, artist, business consultant, or digital marketer, you also need to be a project manager, customer service rep, and bookkeeper all rolled into one.
The top-performing freelancers grasp this quickly, utilizing freelance software to build a solid business management infrastructure. This allows them to create and send contracts, keep track of projects, invoice clients, and make sure income & expenses are recorded and allocated with ease.
And while there are several platforms each specializing in a particular business function, it makes sense to use an all-in-one solution (to save time and money!). Enter: Bonsai.
Bonsai not only gives you access to a range of important freelance features, such as proposals, contracts, invoices, client CRM, and time tracking; it also boasts Bonsai Tax.
Built exclusively for self-employed workers, Bonsai Tax helps you track expenses, maximize tax write-offs, and estimate quarterly taxes. Save an average of $5,600 per year and avoid any nasty surprises at tax time.
You might be one of those lucky few freelancers who enjoy a steady stream of income year-round. But the reality for most is that income varies month to month, or ebbs and flows with the seasons.
With this in mind, it’s important that you plan for any dry spells you may face, and make sure you’re not leaving yourself short when tax time rolls around.
As a rule, try to live off of 50% of your income, putting anything extra towards savings or paying down debt. Just remember, what you make each month isn’t immediately up for grabs. You — and you alone — need to be disciplined and prepared to plan for the future.
There’s an endless list of reasons why people go freelance, but chief among them is an inability (or unwillingness) to find work in a traditional Monday-to-Friday, 9-to-5 setting.
And while this is exciting — being your own boss and setting your own rules and schedules — you mustn’t lose sight of the fact that you, too, will one day retire.
This is where many traditional wage earners have the upper hand. Employers contribute to their employees’ eventual retirement fund, and there’s a greater peace of mind that the future is largely taken care of.
But you don’t have to always think of the short-term as a freelancer. Look at the bigger picture and take steps now to safeguard your retirement. Consider opening an Individual Retirement Account (IRA), or a Simplified Employee Pension (SEP) if you’re structured as an LLC. Both give you the opportunity to set money aside for the future, with varying degrees of tax deductions.
You can learn more about the types of IRAs and SEPs in this guide.
Did you know that you can use Bonsai for accounting? Or that Bonsai can help you be prepared for self-employment tax by providing tax estimates, filling date reminders, and identifying your tax write-offs?
Let's see how that works. First, head to your main Bonsai dashboard and have a close look on the left side - we'll be working with the accounting and taxes sections. First click on "Accounting".
Inside the accounting section, you'll see a breakdown of your income and expenses. Both can either be automatically imported from your bank account, or manually added. Work you got paid for via Bonsai will also be registered here.
Make sure this section is properly filled in and click on "Taxes" next.
This is where the magic happens: Bonsai taxes will do all the calculations for you, and we'll provide you with an overview of your tax estimates, a list of tax deductions you can use for the upcoming tax season, and reminders for all the upcoming filling dates.
Simple, right? If you're ready to check out Bonsai and explore all the features, go ahead and sign up for the free trial!
As a freelancer, it’s important that you’re not left to rely solely on your social security checks well into your golden years — especially if you plan on living comfortably, traveling, and looking after loved ones.
Our advice, therefore, is two-fold: First, make sure you’re taking the necessary steps to maximize your contributions now, and second, plan for retirement by setting up a savings account or pension plan.
And, above all else, stay on top of your tax. Use Bonsai Tax to track and automate expenses, maximize write-offs, and estimate your quarterly tax bills.
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?