Choosing a Business Model Is Key for Freelancers

Picking out the right business model is one of the most difficult choices a freelancer can make. What’s a business model? It’s the way you legally define your business. Different models come with different rules and paperwork. The main two choices are sole proprietorship or a C-Corp.

The first thing to know as a freelancer is that you’ll have to fill out paperwork for anyone who pays you money. They’re going to need your Social Security number, or if you’re an incorporated business, your EIN number.

That way, they can track their payments and the information is shared with the IRS. That means, you’re going to have to pay taxes on whatever you make, whether they come out of your personal account or your business account.

Sole proprietorship is the way most freelancers start out. You do the work, send a bill and get paid. At the end of the year, your customers will send you (and the IRS) a 1099 stating how much you made.

From there, you just use a Schedule C with your 1040 tax form to figure out how much you owe (and you will owe taxes – that’s one big disadvantage of being a freelancer. You wind up paying not only your share of payroll taxes, but also the share that would have been covered by an employer).

By being a sole proprietor, you don’t have to fill out any paperwork with the state and pay a registration fee to create your business, you just start working.

The other option is to form a C-Corporation, which means coming up with a name and tacking an LLC after it. To form a C-Corporation, you need to file special paperwork with the state and keep all finances separate. Going this route, any income you make is taxed at a business rate rather than the personal tax rate. In addition, you’re able to limit your personal liability.

Many freelance writers usually start their businesses out small and grow. As the business gets bigger, you can always change your mind and take your business from a sole proprietorship to a C-Corp. Whatever way you decide to go, it’s best to run it by your tax specialist to get their thoughts on what makes the most sense for your business venture.

Related Post