Nuts & Bolts
Business of Freelancing

The Business of Contract Writing

By Al Portner, WIW Treasurer

So, now you’re an independent contractor. The main appeal is, of course, you’re your own boss. No longer do you have to deal with corporate politics. No longer do you have to show up at an office every day at 9 a.m. and fight all that traffic. You're able to take advantage of government rules that allow you to deduct certain business expenses that an employee can't deduct. You will likely be paid more per job as an independent contractor than you were as an employee.

On the downside, independent contractors give up some protections and perks typically allowed to employees. Your guaranteed paid vacations and paid sick days are gone. You’ll have to do your own government filings (probably quarterly). Gone are the 401Ks or pension plans or company paid health insurance. There's no workman’s compensation if you're hurt on the job.

You will have to pay your own Social Security and Medicare taxes. What? You were already paying Social Security and Medicare taxes as an employee? Yes, you were. But the tax you were paying was only half of what was being paid on your behalf.

Even so, being on your own has definite advantages. The Department of Labor announced in February 2005 that 10.3 million people in the US counted themselves as Independent Contractors. The number of contractors has increased by 15 percent since 2001.

The key word is "independent." The level of control over the work you are allowed to maintain speaks volumes to whether or not you are “independent” or an employee by another name.

Following are the IRS tests used to measure control and determine status under common law. There are actually twenty tests, but they can be boiled down to the following ten.

1. Contractors are generally hired to perform a certain limited task.

2. Contractors have the ability to make profits or suffer losses.

3. Contractors choose where and when work is to be performed.

4. Contractors have the freedom to market their available services to other businesses and to the general public concurrently with the task at hand.

5. Contractors have significant investment in equipment and facility.

6. Contractors may not accept training paid for by the client.

7. Contractors can hire and pay assistants at their discretion.

8. Contractors are paid by the job and cover their own expenses.

9. Contractors cannot be fired unless they fail to produce acceptable results, but they are unlikely to be paid until the contracted job is complete.

10. Contractors cannot be required to produce progress reports or take direct supervision from their clients.It's always best to have a written contract between yourself and a client. It's also best that you provide that contract.

Let them respond to your terms rather than the other way around. This allows you to make sure that you are in control of and protected from each of the potholes listed above that can get you into trouble.

Afraid your clients won’t sign contract agreements? Explain that your intent is to live within the letter of the regulations. You’ll end up with more control over the project definition and the client ends up being protected against being second-guessed by government and subject to significant penalty.

Your dream is that your business will grow healthy enough to need helpers of its own. If your dream comes true and you do need helpers, it becomes even more important that you know what defines a contractor because you might be subject to those significant penalties for not knowing the difference. More about penalties, your responsibilities and the expenses of being in business will be discussed in future articles.

Al Portner is a veteran of 35 years of hiring writers and other creative people. He is not, however, a licensed attorney or CPA. The information discussed above is drawn from experience, taken from IRS publications and other available source documents. Specific questions especially as they pertain to your internal documents should be posed to someone licensed to answer them. Additional information is available at www.irs.gov/businesses/small/index.html.