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I intend to freelance with a client.

It is a one-to-one (person-to-person) contract.

What all should we mention in the contract to prove that I'm earning money legally by freelancing (and effectively not money laundering or anything)?

Will an agreement letter that tells how much I'm getting paid every hour, my full name, the client's full name suffice?

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    Perhaps it is the kind of freelancing I do and the area I reside in, but I've never had to prove such a thing. Can you expand on why this would be an issue? – Avonelle Lovhaug Dec 6 '14 at 15:15
  • Surely if you're being paid by electronic means (and not in cash), the transfer is traceable and the government would be able to establish a legit relationship (declaration of the income on your taxes and the expense on theirs). – user152 Dec 6 '14 at 17:49
  • @AvonelleLovhaug, if your bank account shows a 10 X $1000k deposits, how does the government know it's not money laundering? – user5221 Dec 6 '14 at 18:21
  • Okay, but I don't see the two items - your contract w/ your client and proof to the gov't - as related. – Avonelle Lovhaug Dec 7 '14 at 18:53
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    @learner, actually that contract proves nothing to the government. The contract is for agreements between you and your client regarding the work you will do or service you will perform. If the government was concerned about illegal activity, you would have to do more than show the contract, you would need to prove that you actually delivered services of some kind. Otherwise, criminals would just draw up pointless contracts with each other and be done. – cdkMoose Dec 11 '14 at 17:18
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Usually a contract is not used to establish proof of the legality of income. Instead, invoicing is used to create the necessary papertrail.

In the case of the sale of services or a product, it is necessary to provide an invoice to the client for the amount of time you spent on a project and how much they are due to pay. This invoice serves as proof of income for you and as proof of the expense for them. Here's an example:

enter image description here Source

The important things are that need to be on the invoice are as follows:

  1. Your business name and address details
  2. The name and address of the company you are invoicing (and the contact name if you have one)
  3. A unique invoice reference / number that will relate to this invoice only.
  4. A date for the invoice (which will generally be the date on which the invoice is created - or in accounting parlance, "raised")
  5. A list of the products and / or services that you have provided, line by line, and the cost of each of these.
  6. A total amount for the invoice.
  7. The payment terms for the invoice (i.e. how long the customer has to pay)

In addition to this information the following is useful to also include on the invoice:

  1. Telephone / Fax contact numbers.
  2. Company email address.
  3. Customer Purchase Order Number - so they know which purchase order the invoice relates to if they are using an order management system.
  4. Details on how to pay, including bank account details for BACs / online payments.

If you are VAT regsitered you must also include:

  1. The amount of VAT on each line of the invoice and the VAT Rate charged OR The total amount of VAT charged on the invoice, and the rate, if VAT applies to all items on the invoice.

  2. Your VAT Registration Number

Finally, if you are a registered Limited company, you must include:

  1. Your Company Number
  2. Your full registered company address.

The above list was taken from here.

The invoice is used as proof of income for your taxes and if you get audited, that's what you need to produce with your books.

  • Will email invoices suffice instead of this? Emails contain timestamps, sender and recipient addresses, amount, time spent working, what I did. – user5221 Dec 6 '14 at 18:20
  • I've edited in more detail of what you need. As long as your invoice meets the criteria listed there isn't any reason you can't use email. Note that (1) the addresses required are physical addresses and (2) invoices need to be kept for 5 years (where I live, anyway) and for record keeping purposes it may be nice to have the emails all in one place (instead of scattered throughout your email) and backed up in case you need to provide proof. – user152 Dec 6 '14 at 18:43
  • why is needed to mention actual physical address of the client? I don't know my client's address and all I know is his real name and country. – user5221 Dec 8 '14 at 8:04
  • What's necessary on an invoice is dependant on where you live. Where I am, I can leave off the address of the client only if the invoice is below a certain amount (then it's an "abridged invoice"). The client shouldn't have any issue with giving you their address, and it is probably going to be on the contract in any case (at least, that's my experience. All the contracts I've signed have had the physical address of both parties on it) – user152 Dec 8 '14 at 8:08

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