Stephen Fishman, J.D. author of Deduct It! Lower Your Small Business Taxes 8th Edition “ Comprehensive, current, and savvy ” LIBRARY JOURNAL • Draft solid legal agreements • Avoid trouble with the IRS • Get paid on time YOUR ALL-IN-ONE GUIDE TO BEING YOUR OWN BOSS Free Legal Updates at Nolo.com Working FOR Yourself Law & Taxes for Independent Contractors, Freelancers & Consultants e Story Dear friends, Founded in 1971, and based in an old clock factory in Berkeley, California, Nolo has always strived to off er clear legal information and solutions. Today we are proud to off er a full range of plain- English law books, legal forms, software and an award-winning website. Everything we publish is relentlessly researched and tested by a dedicated group of in-house legal editors, who together have more than 150 years’ experience. And when legal changes occur after publication, we promptly post free updates at Nolo.com. 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L A W f o r A L L EIGHTH EDITION FEBRUARY 2011 Editor LISA GUERIN Cover Design SUSAN PUTNEY Production MARGARET LIVINGSTON Proofreader SUSAN CARLSON GREENE Index BAYSIDE INDEXING Printing DELTA PRINTING SOLUTIONS, INC. Fishman, Stephen. Working for yourself : law & taxes for independent contractors, freelancers & consultants / by Stephen Fishman. 8th ed. p. cm. Includes index. Summary: “O ers the strategies and information needed to become an independent contractor, freelancer or consultant. It explains how to structure a business, negotiate contracts, ensure payments, and understand and pay taxes. e 8th edition includes the most current legal rules for contractors, as well as up-to-date tax information” Provided by publisher. ISBN-13: 978-1-4133-1331-4 (pbk.) ISBN-10: 1-4133-1331-0 (pbk.) ISBN-13: 978-1-4133-1357-4 (ebook) ISBN-10: 1-4133-1357-4 (ebook) 1. Self-employed Legal status, laws, etc United States Popular works. 2. Self-employed United States Handbooks, manuals, etc. 3. Self-employed Taxation Law and legislation United States Popular works. 4. Independent contractors Legal status, laws, etc United States Popular works. 5. Independent contractors United States Handbooks, manuals, etc. 6. Independent contractors Taxation United States Popular works. I. Title. KF390.I54F57 2011 343.7305’26 dc22 2010038423 Copyright © 1997, 1998, 2000, 2002, 2003, 2004, 2006, 2008, and 2011 by Stephen Fishman. All rights reserved. e NOLO trademark is registered in the U.S. Patent and Trademark O ce. Printedin the U.S.A. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without prior written permission. Reproduction prohibitions do not apply to the forms contained in this product when reproduced for personal use. For information on bulk purchases or corporate premium sales, please contact the Special Sales Department. Call 800-955-4775 or write to Nolo, 950 Parker Street, Berkeley, California 94710. Please note We believe accurate, plain-English legal information should help you solve many of your own legal problems. But this text is not a substitute for personalized advice from a knowledgeable lawyer. If you want the help of a trained professional—and we’ll always point out situations in which we think that’s a good idea—consult an attorney licensed to practice in your state. Acknowledgments Many thanks to: Barbara Kate Repa, Janet Portman, Amy DelPo, Lisa Guerin, Stephanie Bornstein, and Alayna Schroeder for their superb editing. Malcolm Roberts, CPA, for reviewing the tax materials. Gary Gerard for sharing his experiences as an independent contractor. e many independent contractors throughout the country who permitted me to interview them. Bayside Indexing for the helpful index. Susan Carlson Greene for thorough proofreading. Margaret Livingston for diligent production work. Table of Contents Your Legal Companion for Working for Yourself 1 1 Working for Yourself: e Good, the Bad, and the Ugly 3 Working for Yourself: e Good 4 Working for Yourself: e Bad 6 Working for Yourself: e Ugly 7 How to Use is Book 8 2 Choosing the Legal Form for Your Business 9 Sole Proprietorships 10 Corporations 16 Partnerships 31 Limited Liability Companies (LLCs) 32 3 Choosing and Protecting Your Business Name 37 Choosing a Legal Name 38 Choosing a Trade Name 38 Choosing a Trademark 42 Choosing an Internet Domain Name 45 Conducting a Name Search 45 4 Home Alone or Outside Office? 47 Pros and Cons of Working at Home 48 Restrictions on Home-Based Businesses 51 Deducting Your Home Office Expenses 55 Pros and Cons of an Outside Office 63 Leasing a Workplace 63 Deducting Your Outside Office Expenses 65 5 Obtaining Licenses, Permits, and Identification Numbers 69 Business Licenses 70 Employer Identification Numbers (EINs) 71 Sales Tax Permits 74 6 Insuring Your Business and Yourself 75 Health Insurance 77 Disability Insurance 85 Business Property Insurance 87 Liability Insurance 89 Car Insurance 91 Workers’ Compensation Insurance 91 Other Types of Insurance 94 Ways to Save on Insurance 94 7 Pricing Your Services and Getting Paid 97 Pricing Your Services 98 Getting Paid 104 8 Taxes and the Self-Employed 121 Tax Basics for the Self-Employed 122 IRS Audits 129 Ten Tips to Avoid an Audit 132 9 Reducing Your Income Taxes 135 Reporting Your Income 137 Income Tax Deduction Basics 139 Business Use of Your Home 149 Cost of Business Assets 149 Car Expenses 154 Travel Expenses 159 Entertainment and Meal Expenses 162 Health Insurance 163 Start-Up Costs 166 10 e Bane of Self-Employment Taxes 169 Who Must Pay 170 Self-Employment Tax Rates 170 Earnings Subject to SE Taxes 171 Computing SE Taxes 172 Paying and Reporting SE Taxes 172 Outside Employment 173 [...]... news is, this book will help you do it This book is a guide to law and taxes for people who either work for themselves or would like to It covers all the legal and tax basics selfemployed people need to know, including: • the benefits and drawbacks of working for yourself • the different types of business entities, and which one is right for you • whether to work at home or rent an office • how to insure... agreements, and get paid • how to handle your taxes and use your selfemployed status to reduce them, and • how to manage employees and record keeping This book is intended only for those selfemployed people who provide personal services, such as writers, consultants, artists, photographers, lawyers, and doctors If your business involves selling goods (rather than services) to the public, this book is not for. .. now to learn the nuts and bolts of self-employment law and taxes can save you countless headaches—not to mention substantial time and money—later on You don’t have to start wearing a green visor and bow tie, but you do need to learn a few rudiments of business and tax law Before you delve into the details of the following chapters, read this chapter for an overview of the pros and cons of being self-employed... Security taxes, or pay for unemployment compensation taxes, workers’ compensation coverage, or employee benefits like health insurance and sick leave for workers who are not their employees Of course, how much you’re paid is chapter 1 | working for yourself: the good, the bad, and the ugly | 5 a matter for negotiation between you and your clients Self-employed people whose skills are in great demand may... her own workplace and equipment Few or No Labor Law Protections A wide array of federal and state laws protect e mployees from unfair exploitation by employers Among other things, these laws: • impose a minimum wage • require many employees to be paid time and a half for overtime • prohibit discrimination and harassment • require employers to provide family and medical leave, leave for military service,... 34 Pros and Cons of an LLC 35 Forming an LLC 36 10 | working for yourself A s a self-employed person, one of the most important decisions you have to make is what legal form your business will take There are several alternatives and the form you choose will have a big impact on how you’re taxed, whether you’ll be liable for your business’s debts, and how the IRS and state... self-employment taxes —that is, Social Security and Medicare taxes on i their net self-employment ncome These taxes must be paid four times a year (along with income taxes) in the form of estimated taxes Chapters 10 and 11 cover this in more detail • partnership, and • limited liability company If you own your business alone, you need not be concerned about partnerships; this business form requires... She must pay both income and self-employment taxes on this profit 12 | working for yourself Sole Proprietorships for Spouses Many businesses are co-owned by a husband and wife Such a business can be organized in a variety of ways—as an S or C corporation, a limited liability company (LLC), or a formal partnership If you and your spouse don’t take any steps to choose a business form, the IRS will treat... titles: • Bankruptcy for Small Business Owners: How to File for Chapter 7, by Stephen Elias and Bethany Laurence • The New Bankruptcy: Will It Work for You?, by Stephen Elias • How to File for Chapter 7 Bankruptcy, by Stephen Elias, Albin Renauer, and Robin Leonard, and • Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Robin Leonard 16 | working for yourself A disadvantage... informed decision if you’re thinking about striking out on your own—or help confirm that you made the right decision if you’re already working for yourself Working for Yourself: The Good Being self-employed can give you more freedom and privacy than working for an employer It can also result in substantial tax benefits Independence When you’re self-employed, you are your own boss—with all the risks and . Contents Your Legal Companion for Working for Yourself 1 1 Working for Yourself: e Good, the Bad, and the Ugly 3 Working for Yourself: e Good 4 Working for Yourself: e Bad 6 Working for Yourself: e Ugly. Stephen. Working for yourself : law & taxes for independent contractors, freelancers & consultants / by Stephen Fishman. 8th ed. p. cm. Includes index. Summary: “O ers the strategies and. consumer and business self-help books and software.” LOS ANGELES TIMES e Trusted Name (but don’t take our word for it) 8th edition Working for Yourself Law & Taxes for Independent Contractors,