Okay guys, there are a million threads asking about these topics so let's address them individually.
Contracts: I know a lot of you are ready and raring to go start your business/freelancing and want to get some good solid contracts to help protect yourself. Let me say that unless you are familiar with your states contract law you probably will end up screwing yourself. More than likely you will end up screwing yourself if you use it enough times.
The fact of the matter is, you don't know contract law. You might accidentally "promise" your client something by simply not stating specifically that you will not provide it, and you will be legally accountable to complete that service.
I understand that legal representation of that sort can cost into the hundreds of dollars per hour, but believe me when I say it will save you that much in the long run. Sit down with a lawyer and go over exactly what you need to put in the contract for what you are offering.
Licenses: You do not need a business license to do freelance work in most states. You do need a license as soon as you want to hire employees or act as a business entity. Discuss this with a business lawyer to be sure what your state requires. Usually it is based on income and employee base size.
Tax Matters: Go see a tax professional. Taxes are different from county to county and the best way to stay in the clear is to get yourself a trustworthy tax representative to help you handle your specific situation.
Remember, everyone here is trying to help as best they can. And we all love free advice. But it is important that you realize the gravity of business law, tax law, contract law, and their effects on you.
Licenses: You do not need a business license to do freelance work in most states.
May I add that you do need a license in many cities, and you need to be sure that you are in compliance with zoning laws. It's usually a very simple and low-cost thing (one-page form and $34 per year in San Diego), but you do need it.
Note, also, that some homeowners associations have issues with home offices. They may require your assurance (in writing) that you won't have clients coming to your home.
There are organizations you can join that have reduced rates for legal fees for various things. One is the legal club of America. A membership to them comes with the National Association of Self Employed, who also offer medical insurance and a wide variety of other services, including a small business consulting service, electronic check recovery service, aire express and leasing /loans.. the list goes on.. good outfit, although their dental plan is not all that great.. but you can opt for what you want with them. Also I think they have a tax help outfit as well.. hesitate to put that in since I do taxes during the season for another outfit that is not theirs. lol
There is a quite of software out there i think it's called contract something and it has web design contracts prebuilt for every us state and canadian province. I've used it and had a lawyer look it over and they were great.
My opinion having a well written contract, if you're a freelancer then whoever your client is, if they have more money, more resources, and more time to fight you on your contract you'll always be at a disadvantage. Laws do vary from state to state, so your contract does need to be relevant, but in my experience it's a very minor part, and it's a formality in case something goes wrong.
I've worked with the largest corporations in the world on contracts, you can only protect yourself so much.
If you want to really protect yourself as a web developer don't accept PayPal or American Express (they favor the buyer), don't allow for refunds (your time is not refundable), set/manage the right expectations before and during your project, and always respond and get the job done (no matter how long it takes). In my 10+ years of experience this will save you grief, money, and time.