Working with freelancers can lend you greater flexibility, agility, speed, and cost savings. But you can only realize these benefits if you are prepared to address all of the legal requirements for freelancers.
Whether you already work with freelancers or plan to start, it’s important to understand your legal requirements so you remain compliant and avoid costly legal consequences.
Here are the top four areas of legal requirements for freelancers that your business should know.
This article is part of our guide on independent contractors’ agreements.
Top legal requirements for freelancers
1. Doing business as (DBA)
Independent contractors and freelancers that have a sole proprietorship or partnership have the option to operate under a DBA name. For example, the freelance writer you hired to produce new website copy might call her business “TopWrite,” but her sole proprietorship would be her name, Carla Smith.
In some cities and Loose, independent businesses are required to register their fictitious name in addition to their sole proprietorship or partnership name. In others, they don’t need to. However, no matter where you are located, you as the hiring company should know both. Here’s why:
- Including both the registered business name and DBA name on all legal documents helps establish liability and ensures the freelancer is correctly named in the event of a conflict or breach.
- Noting both names on payments records allows you to more easily translate payments to their 1099-MISC tax forms, IR35 in the UK or other similar tax forms in other countries, which will include their legally registered business name.
2. Legal agreements
Experienced independent contractors who understand the legal requirements for freelancers might ask you to sign a contract that they or their lawyer has prepared. These agreements usually provide expanded details on various aspects of the freelancer-company relationship, such as the scope of work, who will be involved in the feedback process, compensation, etc.
Even if you happen to work with a freelancer who will not think a contract is needed, do not be tempted to cut through the bureaucracy and start working without one. Aside from the fact that a contract will protect your company’s interests in case something goes bad, signing contracts has also become mandatory in a growing number of states in the US and other countries.
In addition to freelancers’ contracts, your company should also be prepared with its own freelancer terms and agreements. Your legal team will likely require you to ask all non-payroll workers you hire to sign several types of legal documents in order to protect your company from compliance risk, breaches, and unpredictable conflicts, including:
- Contracts: Contracts are legally binding agreements that, when signed by both parties, can be used in court as a means of resolving disputes. Meant to protect both the hiring company and the freelancer, contracts help ensure both parties uphold their ends of the agreement when working together (i.e., delivering the work and providing prompt payment).
- IP agreements: Intellectual property agreements stipulate who owns the work produced by the freelancer. Again, these agreements protect both you and the freelancer. By clarifying when the transfer of ownership occurs, you can prevent conflicts that may arise due to ambiguity on the matter. Most commonly, the freelancer retains ownership of the work they produce until they receive the payment for it. From that point on, the company is free to publish or utilize it however they see fit.
- NDAs and non-competes: A non-disclosure agreement prohibits the freelancer from disclosing proprietary company information or secrets to anyone outside the company, while a non-compete agreement bars him or her from working with your competitors for a defined time period. Some companies don’t require their non-payroll workers to sign these agreements because they assume the freelancer wouldn’t “betray” them in this way. However, it’s always worth protecting your company by getting this agreement down on paper. By clearly articulating these legal requirements to freelancers, you can avoid problems down the road.
- Data protection – A data protection agreement is a statement that sets out how your company protects your customers’ personal data. It explains the GDPR’s requirements to your employees and contractors, and your organization’s commitment to compliance.
Companies do not pay payroll taxes for freelancers, independent contractors, and other non-payroll staff. Instead, self-employed individuals are required to pay their own taxes each year to the IRS.
These taxes include:
- Self-employment (SE) tax, which goes to Social Security and Medicare.
- Income tax for both state and federal income taxes.
Any self-employed individual whose net earnings were $400 or more must file an income tax return.
While your company has no tax obligations, it does need to provide all of the freelancers it hires a Form 1099-MISC each tax season, which includes the total amount your company paid them that year.
Another legal requirement for freelancers is paying for their own health insurance. Unlike regular employees, whose employers sponsor at least part of their health insurance premiums, self-employed individuals need to pay for 100% of their healthcare coverage.
Most freelancers in the US understand this responsibility. However, in the event that they ask your company for coverage or a stipend, it’s important to understand that providing it could alter the nature of your work relationship.
According to the IRS’s “Common Law Rules” for classifying independent contractors, a worker that receives benefits — including health insurance — may be considered a regular employee. If you provide them insurance but don’t provide other benefits or pay payroll taxes on their behalf, you could increase your risk for employee misclassification penalties.
Understand legal requirements for freelancers to protect your company
By learning about all of the obligations freelancers and independent contractors are required to meet, you will be better positioned to uphold your end of the work relationship and protect your company from costly consequences.
In addition to keeping your legal and HR departments in the loop, relying on software that organizes and automates key elements of the freelancer relationship — such as housing contracts and issuing prompt payments — makes managing freelancer relationships far simpler.