Working Without a Contract: Income Reporting and Compliance

Many self-employed professionals end up working without a contract, whether through tight deadlines, friendly referrals, repeat clients, or gigs they found on online platforms. However, these are risky situations that can lead to challenges when trying to get paid, disputes, or tax complications, in which contractors can be vulnerable without contracts.

This article will explain what it means to work without a contract and go in-depth on the associated risks. After that, we’ll explain how to get paid when you don’t have one, and what legal and tax implications you need to consider.

What It Means to Work Without a Contract

Working without a contract usually means that there is a verbal (or other form of informal) agreement between a client and a contractor. For example, the involved parties can have a phone call, a meeting, or an email exchange in which they’ll agree on the terms and services without signing a legally binding document.

This is often referred to as an “implied contract” or an “oral contract,” and is common among professionals who know clients personally or have worked with them in the past. It can also happen in urgent situations, when there’s a need to do the job as fast as possible, and there’s no time for administrative processes.

It’s important to note that verbal agreements are legally binding as contracts in many U.S. jurisdictions. However, a lack of concrete proof and clearly defined terms that protect both parties leaves room for ambiguity and many challenges associated with it. Without a contract, it can be harder to prove that you did the work in case the client doesn’t want to pay.

On the other hand, not having a contract isn’t a tax loophole thatreleases you from your obligations. You still have to report any income you make and pay taxes on it to stay compliant with the U.S. tax laws.

Risks of Working Without a Contract

While you may see some benefits of working without a contract initially (such as reduced administrative burden or less friction between you and the client), the problems can come later on, after the work has been finished.

A formal contract is your main tool for protecting yourself and resolving conflicts. Not having it poses risks, such as:

• Late payment or nonpayment. One of the most direct challenges associated with not signing a contract is having a client who prolongs the payment or decides not to pay at all. Without a contract, you can’t rely on clearly outlined payment terms or enforce late fees, because they don’t exist.

• Scope creep concerns. Contracts are used to define the scope of work. Without them, clients may continuously request small changes, additions, and revisions. They may expect them to be free, while it will cost you time and money. This can result in conflict because you won’t have a contract to refer to, explaining what’s outside the agreement.

• Limited legal protection. A formal contract signed by both the contractor and the client is your first line of defense in court. If your case ends up in a small claims court and you don’t have a contract, the burden of proof will be on you to show that there was a breach of verbal agreement.

• Intellectual property disputes. Under the copyright law, copyright to a contractor’s work belongs to them, unless a contract specifies otherwise. This leads to ambiguity. For instance, clients may be discouraged from working with professionals who don’t create contracts for fear of not having ownership over the final files.

• Audit risks. Contracts are an important part of audit documentation. Not having them can raise red flags and turn a simple verification process into an administrative nightmare.

How to Get Paid When There’s No Contract: 5 Effective Strategies

Even if there is no contract, you are still owed independent contractor payment if you did the work for which you agreed with the client. Here are five effective strategies that can help you collect payments for freelance work without a contract:

#1. Send a Written Invoice

You should always send a written professional invoice, even if the agreement was verbal. An invoice represents a formal payment request and, once it’s been paid, a record of the transaction.

Make sure that your invoice contains all the necessary details, including your and the recipient’s contact details, an itemized description of goods sold or services rendered, your rates, subtotals, taxes, totals, and a due date.

To maximize the chances of getting paid without a contract, send an invoice as soon as the job is finished to create an official record. The client then must either accept or contest it.

#2. Confirm Payment Terms in Writing

If working without a contract, you should at least confirm the payment terms in writing. This can either be done before the project has started or in the middle of it. A simple way to do this is to send an email that contains the details that you discussed with the client, and ask them to confirm it.

Here is a simple example of such an email:

#3. Use Escrow or Milestone Payments

Using an escrow or milestone payments is recommended if you don’t trust the client enough or if the value of the project is high.

Having an established third party in charge of payments will minimize the chances of delays. Milestone verbal agreement payments are another way of ensuring you get compensated for your work. For example, you can send a down payment invoice for 50% of the total amount and request the remainder upon providing the final files.

Unless you trust the client fully, you shouldn’t give them the final deliverables before the payment.

#4. Maintain a Clear Scope of Work

The best way to clearly define the scope when working without a contract is through written correspondence.

It’s recommended to do it before the start of the project. Another way to define the scope is to send a draft of the work or update your client. You can include a brief message that specifies what’s been done, what’s left, and how many revisions the client gets for the initial fee.

This creates a boundary, letting the client know that any additional work or revision comes with a price increase.

#5. Collect Proof of Work

Since the burden of proof is on you in case of a dispute, you must meticulously collect proof of work. This encompasses records like emails, text messages, project drafts, time logs, screenshots, submission confirmations, and everything else that proves your work for the client.

In legal scenarios, you can use this proof to justify the value of your goods or services, even when they weren’t specifically described in a contract.

Tax Implications of Working Without a Contract

Tax implications of working without a contract are no different than if you had one. It’s a misconception that you don’t have to report income if there’s no contract associated with it or if you’ve been paid in cash.

For starters, if a client pays you more than $600 in a single tax year, they will fill out and send Form 1099-NEC to both you and the IRS. Even if there is no contract or you don’t receive your Form 1099, you still have to include this income in your tax return.

Even without a Form 1099-NEC, you must still report your income after making more than $400 in a year. As a freelancer or an independent contractor, you’re responsible for self-employment tax. It is 15.3% for Social Security and Medicare tax in addition to income taxes.

This required diligent self-employed income tracking, as you have to report your income on Schedule C (Form 1040), Profit and Loss from Business. This form will have you sort your income and expenses into distinct categories. Without contracts, you’ll need other documentation to prove these transactions, like invoices and bank statements.

Finally, meticulous tracking and record-keeping help when you need proof of income without a contract. Documents like tax returns, bank statements, and even invoices can all help you secure loans or rent an apartment.

Legal Considerations of Working Without a Contract

Working without a contract is legal, and an oral agreement is just as valid as a written one. However, certain criteria need to be met, such as that you’ve given an offer, the client agreed to it, and the goods or services were provided.

What’s much more difficult, compared to a formally written agreement, is enforcing them. Some types of agreements must be in writing to be enforceable, turning payment collection into a difficult endeavor.

Furthermore, as already mentioned, the burden of proof is on you should the case move to a small claims court. Once there, instead of having a contract to show, you’ll have to provide multiple pieces of evidence, like emails, text messages, work drafts, etc.

Create a Paper Trail With Paystub.org

If you started working without a contract, Paystub.org can help you create alternative documentation to use as proof. Our invoice generator allows you to effortlessly create detailed and professional documents to bill your clients and create a strong paper trail.

On top of that, we also have a Form 1099 generator, if you’re working with subcontractors and need to record payments and track your expenses.

Final Thoughts

Working without a contract is always a gamble that often comes with more downsides than upsides. When the initial benefit of a frictionless agreement with the client and a quick jump into the project wears off, you’re left wondering when and how you’re going to collect the payment.

If you find yourself in this situation, prioritize setting the terms and creating a paper trail as soon as possible. Keep all emails, text messages, invoices, drafts, and other records as proof in case of a dispute.

Lastly, don’t forget about the tax implications. Even if there’s no contract, you’re still responsible for reporting and paying taxes on all income earned from work, after you make $400 in a year.

Working Without a Contract FAQs

#1. Can I get paid if I don’t have a contract?

Yes, you can get paid if you don’t have a contract. Verbal agreements are legally binding, just like written contracts. If you did the work for a client and they agreed to it beforehand, they owe you a payment that you can pursue via an invoice or demand letter.

#2. Is verbal agreement enough to prove work?

Verbal agreement can be enough to prove work, but it’s riskier than having a written contract. If there is a dispute that ends up in court, you will have to prove the arrangement in some way (e.g., by showing text messages, email correspondence, the work itself, etc.).

#3. How can I prove income for a loan or rental?

If you need to prove income for a loan or rent, and you don’t have contracts, you can use your tax returns (Schedule C). For additional proof, you can use your bank statements, Forms 1099, and copies of invoices to show your earnings and cash flow.