Photo By: Simon Abrams

Disclaimer: I’m not an authority on the legal/tax specifics of starting and running a business, obviously. Below is an overview of my own experience starting my freelance business. Any questions or concerns would be better addressed toward a professional who specializes in these matters. However, you can read through my overview and gain a general understanding of some of the areas of consideration that you may encounter in starting your own freelance business. Have fun.

My own educational background in Computer Science affords me the opportunity to pursue alternative and supplementary income routes; one of the most popular being freelance software development and technical consultancy. Freelance development would provide potential opportunities to explore other domains outside those of my traditional employment (Let’s face it, PHP development isn’t in vogue in a lot of circles). However, as I learned and completely expected, this route is very much different than your traditional W2 employment.

So in Fall 2017, I jumped into my role as a part-time freelance software developer. I documented my approach and categorized them into three primary phases:

1. Setting up my business entity.
2. Understanding my tax obligations.
3. Setting up my financial institutions.

First, I decided that it would be worthwhile to form an actual legal business entity for my services. I debated between two entities.

• Sole Proprietorship — Easy and cheap to set up. — Personally liable for debts incurred.
• Single-Member LLC — More legal and liability protection. — A little bit more difficult to set up.

The IRS would treat either entity similarly since a single-member LLC is taxed the same as a sole proprietorship, however designating my business as an LLC would protect my personal assets from any outstanding debt collection incurred by the business by adding a layer of legal liability protection.

So after a bit of research, I started the aptly named and self-titled Blake Adams LLC an LLC incorporated in the state of Mississippi. This was done, easily enough, online. I decided against incorporating in other states such as Delaware and Nevada after weighing out some of the advantages and disadvantages.

Mississippi

• Don’t have to foreign qualify.
• Can be my own agent of register.
• Local to handle any legal issues.

Delaware

• No State Corporate Income Tax if business is not transacted in State.
• No Personal Income Tax for non-residents.
• Flexible business law.
• Court of Chancery which focuses primarily on business.
• Will need to foreign qualify business in the State of Mississippi.
• Still need to pay home state income taxes.
• Need a agent of register in Delaware.
• Need to go to Delaware to handle legal issues.

Nevada

• No state corporate income tax.
• No personal income tax or franchise tax.
• Shareholders, directors and officers of a corporation or members or managers of an LLC aren’t required to be Nevada residents.
• Will need to foreign qualify business in the State of Mississippi.
• Still need to pay home state income taxes.
• Need a agent of register in Nevada.
• Need to go to Nevada to handle legal issues.

Second, now that I had a legal business entity, I looked into the tax obligations that I would likely encounter while conducting business as a single member LLC. Beginning with applying for a federal EIN.

Federal Tax Obligations:

• Income Tax: Pass-through to myself. LLC treated as a disregarded entity. Reported on 1040 Schedule C.
• Estimated Tax: Pay quarterly if expected to owe $1,000 or more in income/self-employment tax.
• Self-Employment Tax: Social Security/Medicare Taxes (If > $400 earned.) The amount subject to self-employment tax is 92.35% of your net earnings from self-employment. 16% (Rounded up from 15.3%).
• Employment Tax: No employees. Single-member LLC so no employment tax.
• Excise Tax: Don’t think that I am responsible for this.

State Tax Obligations (Mississippi):

• Must make quarterly estimated tax payments.
• Income Tax: Also treated as a pass-through so income taxes are filed with the individual TIN. (3% ~ $1 - $5000, 4% ~ $5000 - $10000, 5% ~ $10000 <)
• Franchise Tax: Minimum: $25 - Franchise tax is computed at $2.50 per $1,000 of the value of the capital employed or the assessed property values in this state, whichever is greater.
• Mississippi’s DOR website states: “All corporations, associations, or entities doing business, earning income, or existing in Mississippi are required to file a corporate income and franchise tax return.
• Sales Tax depends on Tax Nexus (Mississippi in my case.) and if the sale is of a tangible good or service.
• Will need a Sales Tax ID # from the Department of Taxation and file a Sales Tax return.

Quarterly Estimated Taxes Schedule

• For income received Jan. 1 through March 31, estimated tax is due April 15.
• For income received April 1 through May 31, estimated tax is due June 15.
• For income received June 1 through Aug. 31, estimated tax is due Sept. 15.
• For income received Sept. 1 through Dec. 31, estimated tax is due Jan. 15.

Between State (5%) and Federal (24%) and self-employment taxes (15.3%), I was looking at around 45% of my revenue going toward taxes. Whoof…

To offset my tax burden, I could potentially deduct some of my business “expenses” including but not limited to:

• Home Office Deduction (Simple Rule $5 per square foot for 300 ft)
• Internet and Phone Bill (Percentage of use for business)
• Computer/Hardware Costs (Percentage of use for business)
• Domain and Hosting
• Self Employment Taxes

So how would this process look?

• Monthly Revenue Distribution — Estimate each month, how much to withhold in business account to cover expenses and taxes. — Self-Employment Taxes: (Gross Revenue * 0.92.35) * 0.153 (12.4% Social Security, 2.9% Medicare). — Estimated Income Tax: 5% State Income, 24% Federal Income — Total Tax Percentage: 15.3 + 29 = ~45% (Though, some people recommend 25-30%)
• Week Prior to Quarterly Estimated Taxes Deadline - Use Form 1040-ES — Determine the total business revenue for that quarter. — Calculate the % of earnings to pay Federal self employment taxes. — Calculate the % of earnings to pay Federal/State income taxes.
• Annual Filing - Use Form 1040 - Schedule C — Pay $25 Franchise Tax to State. — Calculate Federal deductions described above.

Now that I have my legal business entity created and my tax obligation estimated, it is time to determine the best option for banking with my corporation. It is heavily recommended to avoid mixing your personal and business transactions in the same accounts; therefore I began looking for a business checking account solution; beginning with local/regional banks and then continuing to online options.

Some of the main points that I looked for included:

• Fees (Monthly, Annual): Ideally I would like to avoid all fees.
• Minimum Balance Requirements (This usually coincided with fees such as ’ $X Monthly Fee unless minimum balance met) or Minimum Balance to open: Ideally as low as possible.
• Transaction Limits: Once again, ideally none.
• Deposit Fees/Limits: Some banks allow a certain amount to be deposited fee-free but then charge $0.XX per $XXX after that amount.
• Interest Tiers: This is simply icing on the cake, I had no plans of leaving more cash in the account than what would be necessary to pay the schedule expenses and cover the tax expenses.

Unfortunately most local brick and mortar banks were not competitive in comparison to their online competitors and I eventually settled on the Capital One’s Spark Business Checking Account. I determined that a business credit card wouldn’t be necessary for my services since I have no plans of incurring debt or credit in the execution of my services.

Next I needed to review many of the valid payment methods that I could accept:

• Physical Checks
• Bank Wire Transfer
• PayPal
• Google Checkout
• Stripe
• Square Cash
• Freshbooks (In conjunction with PayPal or other services)

Many of the more convenient methods have associated percentage fees (particularly when card transactions are used). The geographical situation would determine which method would be best. With local/regional clients, the convenience of checks couldn’t be overstated enough.

For the most part, I felt like I had a good understanding of the general business structure and operation that would need to be executed behind the scene for any success in freelancing, however the hardest part laid ahead.

Actually obtaining business.