Registration, tax, records and insurance

The part that decides whether the good year survives

This is the least interesting lesson in the course and it prevents more damage than any other. It is also the most country-specific thing here, so what follows is the shape of the questions. Verify everything against your own revenue authority’s guidance, which is free, and pay an accountant once the numbers justify it.

What structure to trade under

Two broad options nearly everywhere.

Sole trader, sole proprietorship, or the local equivalent. Cheap or free, minimal filing, and you and the business are the same legal person, which means business debts are your debts.

A limited company. Costs money to form and to maintain, requires accounts and filings, and separates your personal assets from the business. Some clients, particularly large ones and some agencies, will only contract with an incorporated supplier, which is often the actual reason people incorporate.

Reasonable default: start as a sole trader, incorporate when a client requires it, when the liability is real, or when the tax arithmetic in your country favours it. That last one changes with budgets and is exactly what an accountant is for.

Tax, and the one habit that matters

On the day money arrives, move a fixed percentage into a separate account and do not touch it. Twenty-five to thirty-five per cent, depending on your country and income. That account is not yours.

This single habit prevents the most common freelance disaster, which is not a failed business: it is a good year followed by a tax bill for money that was spent in good faith on the assumption that everything received was income.

Other things to establish early:

• Whether you must pay tax in instalments during the year rather than in one annual payment. Many countries require this, and the penalties for missing instalments are real.
• Whether you must register for sales tax, VAT or GST, and at what turnover threshold. Registering late is expensive; the liability usually applies from the date you crossed the threshold, not from when you noticed.
• How exported services are treated. Selling to a client abroad frequently has different sales-tax treatment from selling domestically, sometimes with a form or declaration required to benefit from it.
• What social security or pension contributions you owe as a self-employed person.

Records

Keep everything: contracts, invoices, receipts, bank statements, and a note of what each payment was for. Retention requirements are commonly five to seven years.

Free tools that are sufficient: a spreadsheet plus a folder per year works for a small practice; Wave, Invoice Ninja and GnuCash are free and do proper bookkeeping; Zoho Books has a free tier for small businesses in some markets. The paid standards are QuickBooks and Xero, and they are worth it once you have an accountant who wants to work in one.

Record income when it arrives and expenses when they occur, in the same place, weekly. Twenty minutes a week; a nightmare once a year.

Insurance

Four kinds, in order of how likely you are to need them:

• Professional indemnity. Covers claims that your work caused a loss. Increasingly required contractually: larger clients and agencies frequently ask for a certificate before signing, and not having one can cost you an engagement outright.
• Public liability, if you visit client sites.
• Health cover, which your employer used to buy and which is now a business cost you must price into your rate.
• Income protection, which pays if you cannot work. Expensive, dull, and the only thing standing between an illness and a catastrophe when you are the entire company.

Contracts

Have two documents. A master agreement covering the standing terms (payment, liability, intellectual property, confidentiality, termination) signed once per client. And a short statement of work per project, which is essentially the proposal from the previous lesson.

Free templates exist and are a reasonable starting point. Paying a lawyer once to review your template, rather than every contract, is among the best money a freelancer spends: a few hundred in local currency, once, covering every engagement afterwards.

When to get an accountant

Sooner than most people do. The triggers: foreign income, crossing a sales-tax threshold, incorporating, or reaching the point where an hour of your billable time costs more than an hour of theirs. In most markets a small practice charges less annually than one avoidable penalty.

The limitation

Everything here is jurisdictional and it changes with budgets. A model asked about your country’s thresholds will answer confidently and may be describing last year’s rules or another country’s.

The durable skill is knowing which questions to ask: what structure, what taxes, what thresholds, what records, what insurance, what forms and when. Take that list to an official source or a professional and you will get the right answers in an hour.