Essential terms every freelancer should know. From taxes to contracts, we explain the jargon in plain English.
A tax form used to report income paid to independent contractors and freelancers. If you earned $600 or more from a client in a year, they must send you a 1099-NEC by January 31. You use this form to report your freelance income on your tax return.
Any cost incurred to run your freelance business. To be deductible, expenses must be ordinary (common in your industry) and necessary (helpful for your business). Examples include software, equipment, marketing, and professional services.
A legally binding agreement between you and your client outlining project scope, deliverables, timeline, payment terms, and other important terms. Contracts protect both parties and prevent misunderstandings. Always use written contracts, even with trusted clients.
Employer Identification Number - a unique nine-digit number the IRS assigns to your business. While sole proprietors can use their SSN, getting an EIN adds professionalism and privacy. Required if you form an LLC or hire employees.
Quarterly payments made to the IRS to cover your expected annual tax liability. Required if you expect to owe $1,000 or more. Payments are due in April, June, September, and January. Underpayment can result in penalties and interest.
The percentage of your total income that you actually pay in taxes. Calculated by dividing your total tax by your gross income. This differs from your marginal tax rate (the rate on your last dollar earned) and gives a clearer picture of your overall tax burden.
Federal Insurance Contributions Act - the law requiring Social Security and Medicare taxes. W-2 employees pay 7.65% and employers match it. Freelancers pay the full 15.3% as self-employment tax, but can deduct half as a business expense.
Your total freelance earnings before any deductions or expenses. This is the sum of all payments received from clients. Gross income is your starting point for calculating taxable income and determining your tax liability.
A formal payment request sent to clients detailing services provided, amounts owed, and payment terms. Professional invoices include your business information, client details, invoice number, date, itemized services, total amount, and payment instructions.
A partial payment (typically 25-50% of the project fee) owed if a client cancels a project after work has begun. Kill fees compensate you for time invested and opportunity cost. Always include kill fee terms in your contracts.
An additional charge added to overdue invoices. Common structures include a flat fee or a percentage of the invoice amount per month. Late fees incentivize timely payment and compensate you for delayed cash flow. Always specify late fee terms in your contract.
Limited Liability Company - a business structure that separates your personal assets from business liabilities. LLCs offer liability protection and potential tax benefits. They require more paperwork than sole proprietorships but provide important legal protections.
Payment terms indicating when an invoice is due. Net-30 means payment is due 30 days after the invoice date. Net-60 and Net-90 extend this to 60 and 90 days respectively. Shorter terms improve cash flow but may be less attractive to clients.
Your profit after subtracting business expenses from gross income. This is the amount you actually keep and what the IRS taxes. Maximizing legitimate business deductions reduces your net income and therefore your tax bill.
Tax payments made four times per year (April, June, September, and January) to cover your income and self-employment tax liability. The IRS requires these if you expect to owe $1,000 or more in taxes. Missing payments can result in penalties.
A recurring payment arrangement where a client pays a fixed monthly fee for ongoing access to your services. Retainers provide predictable income and strengthen client relationships. They typically include a set number of hours or deliverables per month.
A 15.3% tax that covers Social Security (12.4%) and Medicare (2.9%) for self-employed individuals. Unlike W-2 employees whose employers pay half, freelancers pay the full amount. However, you can deduct half of this tax from your taxable income.
When a project expands beyond the original agreement without additional compensation. This happens when clients request extra features, revisions, or work not covered in your contract. Prevent it with clear contracts and change order processes.
The simplest business structure where you and your business are legally the same entity. No formal registration required - you become a sole proprietor when you start freelancing. However, you have unlimited personal liability for business debts.
The IRS tax form used to report profit or loss from a sole proprietorship. You list your business income and deductible expenses here. The resulting profit or loss transfers to your personal tax return (Form 1040).
A fixed dollar amount that reduces your taxable income. For 2026, it is $15,000 for single filers and $30,000 for married filing jointly. Most freelancers benefit more from itemizing business deductions on Schedule C rather than taking the standard deduction.
A business expense that reduces your taxable income. Common freelance deductions include home office expenses, software subscriptions, professional development, and health insurance premiums. Deductions lower your tax bill by reducing the income subject to tax.
A form you fill out and give to clients before starting work. It provides your taxpayer identification number (SSN or EIN) so they can report payments to the IRS. Clients need this to issue your 1099-NEC at year-end.