6 Tips for Cost-Effective Subcontracting

By Lee Polevoi

3 min read

When should you consider enlisting the services of a subcontractor, independent contractor, or freelance consultant for your small business? The need may arise during times of high customer demand or if you need certain specialized skills your employees don’t have. In such cases, hiring a subcontractor is a viable way to scale up in a hurry without incurring a great deal of overhead.

Subcontractors are a valuable resource “when you are in a startup or expansion phase and can’t afford to take on full-time employees to immediately help you operate, market, and grow your new business,” says marketing communications consultant Caron Beesley. “Subcontractors can also help out during busy seasons when you simply don’t have enough hands-on staff.”

Here are six tips to help evaluate whether hiring a subcontractors is a viable option for your business:

1. Look at the Numbers

First, determine whether it’s more cost-effective to hire a full-time employee or bring in a subcontractor to handle a task. This means factoring in wages, Social Security and Medicare taxes, benefits, insurance, and training. Depending on your budget, making use of the time-limited resources of a skilled subcontractor might be the best option.

2. Seek Out the Best People You Can Find

If hiring a subcontractor seems to be a good fit, look for someone genuinely qualified for the job. This could be an individual you already know from past experience or a colleague in your professional network. Another option is recruiting from a reputable online resource such as LinkedIn or Indeed, both of which offer companies the ability to draw from their sizable databases).

3. Get References

After narrowing the search to one or two promising candidates, always ask for references. “If you get stuck with a subcontractor who doesn’t meet the standards of your business or your customers, it’ll be your reputation that ultimately suffers,” notes technical marketing writer Emily Suess. “Talk to others who have worked with the subcontractor to determine how frequently problems arise and how quickly and professionally they are able to resolve disputes or complaints.”

4. Put Your Agreement in Writing

When you hire a subcontractor, put the deal in writing. Outline the projected scope and expenses of the work involved. Specify responsibilities, target dates for deliverables, and anticipated duration of the contract.

5. Know the Tax Obligations

A small business is not responsible for paying a subcontractor’s taxes. Subcontractors must file and pay state, local, and federal taxes on their own. But if your payment to the contractor exceeds $600, you must file Form 1099-MISC with the IRS.

“Unless you’re spoiling for a fight with the IRS, you need to specify in writing that your subcontractors (whether they’re individuals or other businesses) aren’t employees and that they’re responsible for paying their own taxes and benefits,” advises Rosalind Resnick, an entrepreneur and author of The Vest Pocket Consultant’s Secrets of Small Business Success. “Your agreement letter [or contract] should also contain a provision allowing your company or the contractor to terminate a contract upon giving a certain amount of notice.”

6. Be Prepared to Supervise the Process

Hiring a subcontractor might offer the illusion that you can walk away from the project and simply wait for him or her to turn in the finished work. But cost-effective subcontracting doesn’t work that way. You’re responsible for staying in touch with the subcontractor, giving directions as needed, and helping resolve issues if and when they arise. The best results come from active collaboration between you and the subcontractor.

Calling upon the services of a subcontractor or independent contractor may not make sense for every small business, but it’s a potentially valuable — and financially attractive —  alternative to hiring a full-time employee.

“Using the specialist skill set of a freelancer/subcontractor can allow your business to more appropriately meet clients’ needs,” says Beesley. “By hiring specialists for some tasks, your clients are happier, and you’ve kept your own experts focused on the work they perform best.”

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

The Hidden Costs of Inventory

You’ve decided it’s time to invest in new inventory. Your customers demand…

Read more

Schedule C Instructions: How to Save Money at Tax Time

After explaining to someone that you own a business, how many times…

Read more

100 Best Business Blogs You Need to be Reading (and Taking Lessons From)

There are many business blogs on the Internet. Some of the most…

Read more