Whenever you take on a freelance assignment, it’s essential to get the terms in writing. Discussing and drafting a written agreement will avoid misunderstandings and differing recollections regarding key issues like project scope and pay.
The issue may arise in different ways:
- For short, simple assignments, you’ll need to write your own simple letter agreement (there’s a sample below).
- For longer assignments, you’ll want to write up a comprehensive contract, covering issues like liability and dispute resolution. For detailed information on drafting your own contract, see Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants, by Stephen Fishman (Nolo).
- If a client presents you with its own form agreement to sign, you need to know how to review it for fairness and accuracy (more about this below also).
Basic letter agreements
A brief letter agreement is often all you need. It should include:
- a detailed description of the project or services you’ll perform
- any deadline for completing your assignment
- the schedule of hours you’ll work each week, if applicable
- the hourly rate or fixed fee you will charge, and
- how and when you’ll be paid.
Make two copies. Both you and the person who’s authorizing the work should sign and date the letter.
See Exhibit A. To keep your letter agreement short and sweet, it may make sense to detail the scope of the work in a separate document, attached as Exhibit A. Then state in the letter that you will perform the services described in Exhibit A of the agreement.
More comprehensive contracts
If you’re hired by a client for a complex project or for one that will last many months, you’ll need a written agreement that clearly defines the scope of your assignment and establishes your status as an independent contractor for tax purposes.
If you want to draft your own agreement from scratch, you’ll find step-by-step instructions in Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants, by Stephen Fishman (Nolo). You can also find sample freelance agreements tailor-made for different occupations in Consultant & Independent Contractor Agreements (Nolo), also by Stephen Fishman.
Reviewing a client’s agreement
Many clients, especially those that deal with freelancers regularly, will present you with a form agreement to sign. Expect such agreements to be carefully structured with the client’s best interests in mind, not yours. Go over the document with a fine-toothed comb. You’ll first want to make sure that all of the key terms—such as your pay rate, project deadline, and payment schedule—are in line with what you negotiated. No matter what you and the client might have discussed in person, the written agreement wins in a dispute. You’ll also need to confirm that the client’s agreement includes everything it should. At a minimum, it should state:
- your name and address
- the client’s name and address
- the date the contract begins and ends
- a complete and accurate description of the services you’ll perform
- how much you’ll be paid, and
- how often you’ll be paid.
Finally, check the client’s agreement for unfair clauses that could end up costing you money down the line. Here are some things to look out for:
Indemnification clauses. These are provisions that require you to indemnify the client for losses arising out of the services you perform, trouble with tax agencies over your independent contractor status, or intellectual property disputes connected to your work. You can spot these clauses by looking for the word “indemnify” or the phrase “hold harmless.” If at all possible, delete these clauses entirely from the agreement. If the client isn’t willing to go that far, negotiate a liability cap that limits your exposure to a specified amount.
Make Sure You’re Properly Insured
Proper business insurance coverage can be the key to your survival in the event you’re ever sued in connection with your freelance work. There are two different types of liability insurance—general liability insurance and professional liability insurance. You may need both types of coverage.
Incorporating your business or forming an LLC can give you some protection from lawsuits, but not as much as you may think. For example, unless you have insurance, you can still be personally liable if someone is injured because of your malpractice or negligence, and your assets can still be taken to satisfy a court judgment an injured person obtains against you.
For more information on your insurance needs as a freelancer—including health, liability, and property insurance—and where and how to obtain it, see Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants, by Stephen Fishman (Nolo).
Noncompetition provisions. Any provision that limits your ability to perform similar services for the client’s competitors could stop your freelance career dead in the water. The most you should ever agree to is to refrain from performing identical services for a specified list of the client’s competitors while working for that client.
Confidentiality provisions. It’s important that you be able to give future clients general information about projects you’ve worked on. If your agreement contains an overly broad confidentiality provision, you may not be able to market your services or work for the client’s competitors without fear of violating the contract. If you can’t delete
this from your contract, make sure the provision is reasonable in scope and defines precisely what information you must keep confidential. Also, it should last for a limited time, one or two years preferably.
A “time is of the essence” clause. This means that if you’re the slightest bit late on your deadline—even for a justifiable cause—the client is entitled to terminate the contract without paying you and to sue you for damages. Delete this from your contract if you need any time flexibility with your work.
A terminate “at will” provision. You don’t want the client to have the right to cancel your agreement for any reason or no reason at all. If the client insists on this provision, make sure that the agreement gives you the same right to cancel and entitles you to payment for any services you’ve performed up to that point.
Negotiating changes to a form agreement can be challenging. But once you and the client come to agreement, making the changes legally binding is simple. You can delete provisions by just crossing them out. You can add new wording by simply handwriting the new language on to the document. Both you and the client must initial in the margins wherever changes are made.
Tack on a rider. If you make many lengthy changes to the client’s agreement, it’s best to type up the new language and attach it to the original as a rider. The rider should state that in the event of a conflict between the contract and the rider, the language in the rider prevails.
Qualifying as an Independent Contractor
To Uncle Sam, the question of whether you’re an independent contractor or an employee is significant. Companies that hire employees have burdensome tax obligations. For example, an employer must pay half of an employee’s Social Security and Medicare taxes and withhold taxes from an employee’s paycheck. There are no such obligations involved when a company hires freelancers, referred to for tax purposes as “independent contractors.”
Not surprisingly, the IRS prefers workers to be classified as employees. The agency has drafted strict rules about who qualifies as an independent contractor, including penalties for companies that misclassify their employees.
The test for whether a worker is an employee or an independent contractor is the “right of control.” If a company has the right to direct and control how you work—including the details of when, where, and how you perform the work—the IRS will consider you to be an employee and not an independent contractor.
You’re most likely to run into classification problems if you work full time for a single client at the client’s offices. If you work at home a few hours a week for many different clients, your independent contractor status isn’t likely to be questioned.
Technical services workers, like computer programmers and systems analysts, are subject to special rules making it more difficult for them to qualify as independent contractors. If you fall into this category, you might be able to get around the problem by forming a corporation or a limited liability company (LLC). Companies are often more willing to hire one-person corporations or LLCs than individual technical workers for fear of running afoul of the IRS rules.
You can learn more about the rules governing independent contractor classification in Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants, by Stephen Fishman (Nolo).