Business Law

Contractors, Consultants and Freelancers and Your Business

Using subcontractors can get your small business out of a jam when you have more work than you can handle. If you don't want to add additional employees who will linger on your payroll long after the end of a temporary surge, you can assign a portion of your work to another business or to an individual. Subcontracting involves hiring someone else to perform work your business has contracted to do.

Subcontractors Offer Expertise

One reason to use subcontractors is to take advantage of their expertise. For example, your business might have contracted with a client to build a house. Houses require electricity. If neither you nor your employees are experts at installing wiring, you can use a subcontractor to deal with the electrical aspects of building the home.

Subcontractors Cost Less

When you hire employees, your business must pay Social Security taxes and Medicare on their behalf. Subcontractors aren't employees because you contract with them to do one particular thing. Therefore, they're responsible for paying their own Social Security and Medicare.

Subcontracting is less expensive than keeping an employee on the payroll to perform specialized work, especially if you don't need the specialized work done on a consistent basis.

Follow IRS Rules

Some businesses are tempted to classify employees as subcontractors in an effort to save money. The Internal Revenue Service has very strict rules about this. If you don't withhold and pay a portion of Medicare and Social Security on behalf of someone who is actually your employee, your business could be subject to fines and penalties.

In general, if you control when individuals work for you and directly oversee the work they do, they're employees, not subcontractors.

Get It in Writing

You can protect your small business by directly contracting with your subcontractors, including terms for payment and exactly what you're retaining the subcontractor to do. With a written contract, neither you nor the contractor can dispute aspects of the work or payment terms after the job is completed, except as listed in the contract.

Get the Right Insurance Coverage

You might want to check with your insurance provider before deciding to use a subcontractor for your small business. Many general liability policies do not cover errors, damage, or injuries caused by non-employees. You might need an additional rider or policy. Most workers compensation policies don't cover non-employees. You could find yourself liable if your subcontractor gets hurt on the job.

A Business Lawyer Can Help

The law surrounding the use of subcontractors is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.

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