Many designers seek full-time staff positions, but it's also possible to build a very successful career as a freelancer. In fact, the U.S. Department of Labor reports that three out of ten designers are self-employed. Some independent designers work directly with business clients, submitting fixed-fee proposals for specific projects. Others prefer to work behind the scenes as an additional resource for established creative firms. Most design firms and agencies cope with temporary increases in their workload by bringing in outside designers on a sub-contractor basis. A freelancer with very specific skills is brought in to help with a particular phase or aspect of a project and the freelancer is usually paid a negotiated hourly rate.
If you are doing freelance work, remember that you are a one-person business. Design firms and agencies will make gross payments to you-that is to say that no taxes or other amounts will be withheld. You are responsible for all of your own taxes, insurance and other business issues. Without a clear understanding of this, it's easy to get into trouble-particularly with the Internal Revenue Service.
The IRS pays special attention to independent contractor relationships. Unfortunately, it's not unusual for hiring companies to deliberately misclassify workers as freelancers rather than employees in order to avoid paying employer taxes. To determine whether an independent contractor really should have been put on the payroll, the IRS looks at 20 factors relating to behavioral control, financial control and the overall nature of the relationship between the parties. A general overview of these issues can be found in IRS publication 1779, “Independent Contractor or Employee,” which can be downloaded from www.irs.gov as a PDF file. The factors themselves are listed below (along with some notes about how they might be applied to design).
IRS 20 Common Law Factors
- No instructions (You are being brought in as an expert who will quickly understand what needs to be done.)
- No training (You are already fully trained.)
- Services don't have to be rendered personally (If you have your own staff, they might work on the project instead of you.)
- Work not essential to the hiring firm (Your clients should already have core resources appropriate to the business they are in.)
- Set own work hours (As a business owner, you should have some flexibility in determining your schedule.)
- Not a continuing relationship (Your work is project-based rather than open-ended, so there may be gaps between assignments from any given client.)
- Control your own assistants (If you have staff, they report to you rather than to your clients.)
- Time to pursue other work (You need to balance your involvement in active projects with the ongoing marketing activities necessary for your business.)
- Decide on job location (When not in meetings or presentations at the client's office, you should be able to work on client assignments in your own studio or home office if you choose to do so.)
- Order of work set (You should have some control over the specific sequence of actions that you will perform.)
- No interim reports (Your work should be measured in terms of specific milestones and deadlines, rather than blow-by-blow accounts of your activities.)
- Paid by job (Your assignments should be individual projects and you may be compensated on a fixed-fee basis.
- Work for multiple firms (You should have more than one client at any given time.)
- Pay business expenses (As a business owner, you pay for your own insurance, taxes and other expenses.)
- Have your own tools (You should already own whatever equipment and supplies are necessary for you to do your work.)
- Significant investment in your business (For designers, the purchase of computer equipment and software is a significant investment.)
- Offer services to general public (If a stranger needed the kind of services that you provide, would they be able to find you?)
- Can make an entrepreneurial profit or loss (If you have not priced or managed projects correctly, your business might not be profitable.)
- Can't be fired at will (This is in contrast to staff members who have signed at-will employment agreements-their positions can be eliminated at any time for any reason or no reason at all. Your work should be project-based with some agreed-upon method for giving notice of cancellation and calculating any final payments that may be due.)
- No compensation for non-completion (Client payments tend to be contingent upon your successful completion of specific tasks)
When you use these factors to analyze your own situation, you may find that your answers are a bit contradictory. Some things might point toward an employer/employee relationship, while others support your independence. It's important to understand that no single factor will determine your status. All of the factors need to be weighed against each other as if on a scale. The IRS will look to the majority of evidence. With this in mind, you need to be prepared by structuring and documenting your activities in such a way that the weight comes down on the side where you want it to be.
Your Small Business
It's a good practice to separate your business income and expenses from your personal finances. Opening a business bank account makes this easier. Like any small business, you will also need to consult with a CPA for tax advice and the preparation of your tax returns. Since you are not on anyone else's payroll, be aware of these issues related to taxes and benefits:
Benefits you have
You will be covered by Social Security for the self-employed because it is required by law. You must pay both the employer and employee portions. Your CPA will help you to calculate the amounts and meet the deadlines.
Benefits you don't have unless you provide them
Vacation and sick time
Workers compensation insurance
(The requirements for workers comp vary by state, but it is usually not required until you hire another person to work with you.)
Independent Contractor Agreement
When you perform freelance services for a design firm, a number of different documents will be generated over the course of the relationship. Your relationship will start with a general document called an independent contractor agreement. All large design firms and agencies will have one that they ask you to sign before any services are performed. Typically, this agreement only needs to be discussed and signed once because its purpose is to describe the underlying nature of the relationship, rather than to describe any single project.
The wording of the agreement will vary a bit from firm to firm. The essential contents will include: a reiteration of your status as an independent contractor (including the fact that you are responsible for your own taxes and business expenses), a commitment on your part to maintain the confidentiality of all information shared with you, a guarantee from you that the work you deliver will be original and will not infringe on the rights of any third parties and an assignment by you of intellectual property rights.
Intellectual property rights are negotiated differently when you provide services directly to business clients. There's a good reason for this. Design firms need to acquire all rights from their team members-whether employees or freelancers-because they in turn will be selling some or all of those rights to their business clients. Obviously, design firms cannot sell that which they do not own.
This assignment of rights is done with work-for-hire language. Work-for-hire is part of U.S. copyright law. The standard definition of work-for-hire is a work created by an employee as part of his or her job. Copyright belongs to the employer, who is recognized as the legal author. (One implication of this is that a departing employee should always ask before taking anything that might be considered intellectual property. Even though you have created something, you need your employer's permission before you can add it to your portfolio.)
There is a second definition that is important to freelancers. Work-for-hire can also include a work specially ordered or commissioned, if the parties agree in writing that it will be considered a work-for-hire. Work-for-hire language might show up once, in the independent contractor agreement signed at the beginning of the relationship, or it may be stated separately on each project purchase order that is issued to you.
Some firms might also attach an addendum or exhibit to the basic independent contractor agreement to describe the type of services that you will be providing and how you will be compensated. It's more common for that information to appear later, in project purchase orders.
The last of the new relationship documents that you need to complete and sign is a form W-9. Each design firm and agency that sub-contracts work to you will provide you with a blank one (they can also be downloaded from www.irs.gov). Your completed W-9 officially notifies the design firm what name and federal tax identification number (usually a personal Social Security number) should be used for you in their records.
Now that you've been set up as a resource, assignments can be given to you. Design firms plan out project budgets very carefully. When a portion of a project is assigned to you, the details will be spelled out in a purchase order. The purchase order confirms specific information about the project, its schedule and deadlines and your individual budget-probably stated in hours as well as dollars. In most design firms and agencies, the purchase order will be issued to you by a project manager or producer.
As you perform services, you will periodically request payment by submitting invoices. On large projects, you should negotiate to submit bills every week or two (for your own cash flow purposes, it should never be less than monthly). You will appear as a vendor on the records of the design firm. All payments to you will be made through their accounts payable system, which means that there will usually be a delay of 15 to 30 days. Individual invoices should reference the relevant project purchase orders, and can include whatever additional detail the design firm requests. However, you should not be asked to fill out the design firm's internal timesheets-it is only appropriate for their employees to do so.
At the end of each year, the design firms that you have worked with will add up the amounts paid to you (not the total of your billings to them, but the total of their actual checks to you). If they have paid you $600 or more during the calendar year, they must send you a completed form 1099-MISC by January 31. If you've worked on projects for lots of different firms, you'll accumulate a big stack of 1099 forms. Be sure that you attach all of them to your tax return-the IRS has already received duplicate copies and that information will be compared to what you file.
A few states have additional filing requirements related to independent contractor relationships. You'll need to check with your own state government to learn about these. For example, California requires the company purchasing freelance services to give the state advance notification (by filing form DE-542) of individuals who will receive more than $600.