Freelancing

In the past few weeks I have received a number of questions about how, why and when to incorporate a freelance business. I’m not an accountant or an attorney, but I’ll give an overview of the topic along with some of my own thoughts. After starting out as a sole proprietor (a self-employed freelancer who is not incorporated), I formed an S-Corporation about 4 years ago and have been very happy with it, although I know freelancers who are LLCs, C-Corporations and people who have been sole proprietors for 20+ years and have no desire to change!

It goes without saying that this information is a) not a substitute for advice from an accountant or attorney and b) depends a great deal on your individual situation and your geographic location. For the purposes of this post, we’ll assume that the prospective corporation will consist only of you, and that you are not going to have shareholders, stock, holdings in other corporations, etc.

Why incorporate: Incorporating gives you some liability protection in that it separates your business’ assets from your personal assets (i.e. your house, car, etc.), and any business-related lawsuits target only the business. Incorporating can save you a substantial amount on taxes, because some corporate structures allow you to avoid paying self-employment tax on all of your income. Corporations may also project a more professional image than a sole proprietorship, which can be an asset when marketing to direct clients. In addition, if you decide to expand your freelance business at some point, being incorporated makes it easier to hire employees or subcontractors. A corporation may also allow you to contribute more pre-tax money to a retirement plan.

Disadvantages of incorporating: Incorporating requires additional paperwork, and the filing fees depend on your state. In some cases, corporations are required to file quarterly payroll taxes and there can be big penalties if you don’t file them. A corporation must file its own end of year taxes, so that’s another tax return on top of your personal tax return.

To me, tax savings are the biggest advantage of having an S-Corp. An S-Corp allows you to take part of your income as “wages” and part of your income as “profit,” and the profit is not subject to self-employment tax. In my case, I took about $35,000 of income as profit in 2007, resulting in a savings of over $5,000 in self-employment tax (self-employment tax is an additional 15% on top of your regular federal rate). Although an S-Corp has to file quarterly payroll taxes ( for me, these are federal income tax, state income tax and state unemployment contributions), I paid my accountant to teach my how to do the payroll taxes myself and they now take me under an hour per quarter. The way I look at it, I’m effectively earning $1,250 an hour to do payroll taxes, which is much more of an incentive than I need to remain an S-Corp!

Corporate structures and how to incorporate: Incorporating is not hard; if you can run a successful freelance translation business, you can incorporate it yourself. It’s a good idea to talk to an accountant about the best corporate structure for you. The three main options are S-Corp, C-Corp and LLC. As stated above, I feel that the main advantage of an S-Corp for a freelance translator is tax relief, so it’s worth investigating which structure will give you the most benefit in terms of avoiding self-employment tax. The S-Corp requires that you pay yourself a “reasonable salary” as defined by the IRS, but my impression is that there is not a hard and fast rule about what that amount is; I usually go for about 50% salary and 50% profit.

The first place to look for information on incorporating is your state’s Secretary of State website. There you will find all of the information on the filing fees and requirements for your corporation. You will also need a Federal Employer Identification Number, which you can obtain for free from the IRS. Once you are incorporated, the EIN replaces your social security number as far as your clients are concerned.

Fees for incorporating can vary widely; in Colorado it costs $20 or less to form and renew your corporation, but when I looked at the website of the Massachusetts Secretary of State, the minimum fee to form an LLC appears to be $500. So, it’s worth checking the fees and requirements for your location and balancing that with the potential savings. If you currently earn $25,000 a year from translation and have to pay a $500 filing fee plus the cost of an additional tax return, the ultimate savings may be minimal. However, I’ve heard various accountants say that anyone who is a sole proprietor and earning more than $40,000-$50,000 per year can benefit from incorporating.

It seems like a common question of late is “How is the economy affecting your job?” While translation may not be recession-proof, my sense is that most of us are doing fairly well even in the down economy. The reasons behind this could be a post in themselves: for one, the weak U.S. dollar makes it attractive for overseas companies to purchase goods and services (including translation!) here. So for now at least, it seems that most U.S.-based translators aren’t suffering from a lack of work.

However, unscientific evidence suggests that late payment and non-payment are getting to be more of a problem. For example, in the first 5 1/2 years that I freelanced, my late payment and non-payment problems were very minimal, and dropped to nearly zero after I started requiring individual clients (i.e. not established companies) to pay in advance. In the last six months, this situation has changed dramatically, and I’ve had to deal with three different non-payment situations involving established companies. In all three situations, I had reason to believe that the company was solvent and reliable; i.e. I had worked with them before or a trusted colleague referred me.

Interestingly enough, all three of these non-paying clients dealt with the situation in exactly the same way: by doing nothing. Whether I e-mailed, called, or sent a certified letter, they simply did not respond at all, except to sign the return receipt for the certified letter.

Because of this trend, I’ve revised my terms of service. In addition to requiring individual clients to pay in full in advance, I’m now requiring that if a company is not a member of ATA or a similar association or is not rated on Payment Practices, it must pay 50% in advance for at least the first project. I can still see some problems with this policy, but for now I feel that it protects me against a complete non-payment situation.

Is the economy changing how you do business?

One of the great things about our industry is the variety of people we get to work with; people from all different countries, cultures and ethnic and linguistic backgrounds. The other side of this coin is that we have a lot of clients and colleagues who aren’t named Bob or Janet, which brings up a few issues that we need to pay attention to:

• Get the spelling right. Take this from someone who receives e-mail addressed to Corrine, Corrinne and even “Hey Connie!” (from someone I’ve never met). If someone has an uncommon name, copy their name from the e-mail that they sent you so that you get it right. When it comes to first impressions, there really is no bigger turnoff than being addressed by the wrong name.
• Call people what they ask to be called. In some cases, people want to be called by a name that isn’t their given name, and really that’s their prerogative. I learned this lesson when I kept insisting to an Asian acquaintance that I wanted to try using her Chinese name, rather than Veronica, the name she used in English. Finally she explained that it pained her to hear English speakers butcher her Chinese name, and she’d really (really) rather be called Veronica. Another Asian friend told me that he (emphasis on “he”) asked to be called Scott rather than his Chinese name, Hoa, because he was “tired of getting rejection letters addressed to ‘Dear Ms. Ly’.” So, use the name that your client or colleague asks you to use.
• Use titles wisely. Similar to French’s use of “tu” and “vous,” it’s sometimes hard to know when to use a title and when to use someone’s first name. In general if you’re contacting a prospective client, a title is a safe bet. In English, always use “Ms.” for women even if you know that the person is married. Again, take this from someone who receives e-mail to “Dear Mrs. McKay,” which is actually my mother, since I don’t use my husband’s last name. The place where I think it’s good to omit a title is when you want to put someone at ease; when someone is contacting you as the employer/authority/job reference, etc. and you want to let them know that you’re really not that scary, I think it’s good to respond to the “Dear Mr. Warren” e-mail with “Dear Celeste, thanks for your message and feel free to call me Paul.”
• Gender. This is a hard one. If you have a name that is used for both genders (Chris, Alex, Terry, etc.) or a name for which the gender is not obvious to English speakers, you may or may not want to clarify your gender. It’s easy to do with a simple “Ms. Alex Thomas” or “Mr. Fouad El Tawil” in your e-mail signature file, but of course it’s up to you whether or not you want to do this.

Especially in uncertain economic times, it’s critical to find out what other translators are saying about prospective clients before you take on work from them. In addition, even those of us who make a standard practice of checking an agency’s payment ratings before accepting work need to add an additional step: re-checking the ratings for an agency that we haven’t heard from in a while (don’t ask me how I know this!). It’s important to remember that an agency’s fortunes can change over time, and that word of this normally surfaces on agency rating lists fairly quickly.

About Translation has an excellent post on agency rating lists including the subscription fees for the well-known services. The important thing isn’t so much which list you choose to join, but that you always check it before accepting work from a new client, or before accepting repeat work from a client that you work for on an irregular basis.