For on-premise freelance help, individuals must be able to justify themselves as a bona fide business entity or the company writing the payment check must treat the freelancer as an employee. The government has a list of 20 questions which they use to determine eligibility. The list includes business registration, self-promotion and advertising, listing in the yellow pages, using own equipment or tools, who has direction and control of the work being done, business letterhead and stationary, printed advertising of services, medical and other insurance coverage and so on. In short, if it looks like a duck and walks like a duck, it is a duck!
For off-premise freelancers it is a little simpler, but one company cannot be the freelancers' sole source of income. If freelancers work out of their studio with their own equipment and have direction and control over the project, they can be justified as independent.
By far, the best way to be an Independent Contractor is to
incorporate. We've found a service that will do it very reasonably
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There are advantages and disadvantages to incorporation. The advantages are that you are considered an independent contractor under all circumstances so long as the corporation does the billing; it also gives you personal immunity from any lawsuits or legal problems. The disadvantage is that you are required to file corporate tax forms at the end of the year and pay corporate taxes. Minimum corporate taxes in New York are about $300 per year. Check your local state's policy.
If you are not ready for incorporation as wish to be independant, at least go to your local County Clerk's office and file for a Sole Proprietorship or Partnership. The charge for that is generally less than $50 and their are no special taxes involved. You can officially file for a business name or use your own name. It is also good to register for an Employer Identification Number (EIN) with the IRS.
If there are no official documents justifying your business status, the 20 questions are very important and will determine your eligibility.
If the freelancer does not qualify as an independent contractor,
and the employer has direction and control over what is being
done, payroll taxes must be deducted from your paycheck and partially paid
by the employer. Unemployment and disability insurance are also mandatorypayments by the employer. If the company does not comply
and is later found to be guilty on non-payment, retroactive taxes and fines
will be assessed. If the same freelancer works at the same company for over
1500 hours in a year, the employer may also be obligated to pay
other benefit packages allotted to their regular staff.
Over 40 hours working on-premise in a week is considered overtime
by the government. Some companies will also pay overtime for
evening or weekend work because it is harder to get talent at
those times. Rush projects get higher prices.
The law in this area is best explained at http://www.loc.gov/copyright/title17/
"Work for hire" is a legal term that allows a company
to treat a freelancer as an employee for the sole purpose of
owning all the freelancer's intellectual and creative talents.
Since there are no benefits or salary involved, many freelancers
are opposed to doing work on these terms and the Graphic Artist's
Guild is completely opposed to it. To grant these rights, the
freelancer must sign a legal agreement that they are giving
away their rights as "work for hire".
Rules vary from State to State. Check your local area.
Links to States
In New York State, anything that passes ownership from one party to another is considered tangible property and therefore taxable -- unless it falls under the State's long list of exceptions. The work of writers is generally considered more cerebral and falls under the exception list. While a magazine article is not taxable, a report furnished by a consultant is taxable. Artwork and computer graphics are taxable, even if the person is only working on part of a project.
The ultimate user is responsible for the tax and so design studios, publishers and advertising agencies usually provide a signed Resale Certificate with their business identification number. This states that they are not the ultimate purchaser and therefore the work done is not taxable at this time. In some cases they may choose to pay the tax and get a credit from the government.
Another method of not paying sales tax is to purchase only the reproduction rights. This means that the creator owns the physical entity and the client pays to use it, generally for a specific purpose, market or period of time. The price is generally less than a full buy-out purchase price and the freelancer can sell the artwork again later for additional money.
The tax applies to the state where the transfer is made. Hence, if an illustration is done in New York and shipped to Florida, there is no tax due in New York. If you do a lot of business in another state, you may be required to register to do business in that state. If there is a question, see you accountant.
Click for download of W4 Form
W-9 Request for Taxpayer Identification
US Government Forms
Links to States