Many freelancers know this problem all too well: At some point, you just can’t take on any more clients. You run out of time and energy, and your income potential hits a ceiling because you just can’t do anymore by yourself. It might be time to consider whether to subcontract freelance work.
A service-based business can’t scale, right? Well, that’s not entirely true.
While yes, you only have so many hours to give and can only take on so many clients as one person, you can outsource (or subcontract) your work to allow your business to scale.
What is subcontracting? It’s when one independent contractor (main contractor) outsources work to another independent contractor (subcontractor). But before you go down this route, here are some challenges to consider.
How to maintain the same level of quality
Keeping quality high when you subcontract freelance work can be a challenge. Just ask Miranda Nahmias, who runs a digital marketing and virtual assistance team of subcontractors.
“Maintaining the same level of quality as I’ve grown into a larger team is actually one of the biggest struggles,” she says. “I actually feel like we do a really good job, and rarely make mistakes. In some ways, I feel that my quality is actually better now that I have a team.”
An additional advantage to subcontracting is that you can select freelancers who are experts in fields you don’t know much about.
“Each piece of the finished product was completed by someone who is awesome at what they do,” Miranda explains, “so the end result is of really great quality. It also allows us to be faster for those same reasons. We can have one team member work on one part of the project while another is doing a different part.”
To prevent any slip-ups, you need to have an operations manual in place before you subcontract freelance work. An operations manual details all the processes you have in place in your business — from onboarding to project management to invoicing — so that everyone knows what’s going on and how to do things efficiently. This helps things run smoothly.
Additionally, you as the main contractor need to have an oversight and review process in place. Before you hire a subcontractor, it’s important to thoroughly vet them. Afterward, you must review all work that comes from your subcontractors before it gets sent to the client.
To manage projects and oversee your team, consider using tools such as:
- Slack for internal communications
- Trello for project management
- Google Drive for sharing files
The best part? All of these tools are free.
Telling your clients when you subcontract freelance work
One thing that will shift in your freelance business when you begin subcontracting regularly is that you essentially become your own agency. You are the main contractor outsourcing to all the freelancers you have in your repertoire. You are in charge of managing the freelancers under you, maintaining client relationships, and reviewing all work.
Transparency becomes tricky at this point.
My opinion is that you should always disclose to a client if you will be outsourcing your work to someone else. For example, if I hire a freelance writer to write articles for my website, I fully expect that the writer I hired will do the work. If they are going to subcontract to a different writer, I as the client have a right to know that. Some client contracts might even prohibit subcontracting work.
So if you’re transitioning to subcontracting in your freelance business, tell your current clients about the shift. Let them know you will still be around overseeing everything, and you will review all work.
Put them at ease by letting them know more about your team. Be there to answer any questions.
If you’re taking on new clients, just let them know you work with a team. Tell them which freelancers will be working directly with them, and let them know where you will step in during the process.
How to price your services and pay your subcontractors
When you start subcontracting your freelance work, it’ll eat into your profit margins. For example, instead of taking home the full $400 for a blog post, if you outsource it to another writer, you now have to pay that writer. That means you might end up paying the subcontractor $150 and keeping $250 for yourself.
So how much should you charge your clients in order to be able to pay your subcontractors and yourself?
For agencies, the markup tends to be much higher. Large traditional PR agencies, for example, can mark up their subcontractors’ fees by as much as 200 percent, according to Solo PR Pro.
But for an individual freelancer like you, the rate varies widely. One consultant reports working as a subcontractor and getting paid 40- to 50-percent of what the client was billed. Here’s an example of what that might look like: A web designer subcontracts another web designer for a website redesign project billed to the client at $4,000. If the subcontractor gets paid 40-percent of the client bill, then the subcontractor will receive $1,600, while the main contractor gets $2,400. However, Enrolled Agent Craig Smalley says businesses should limit payroll to a maximum of 30 percent.
In the end, you need to do some calculations to figure out how much profit you need to make in your subcontractor relationships in order to keep your business afloat.
How to cover your legal bases
Before we begin this section, I must point out that I am a freelance writer, not an attorney or legal professional, so the following is not legal advice.
Contracts
When you involve another party in your business, you should always protect yourself legally.
Having a subcontractor agreement in place is a great place to start.
In it, you should clearly define how and when the subcontractor will be paid. Even something like defining payment terms for your subcontractor can be filled with legal challenges. You can meet with a lawyer to draft a solid contract, or you can purchase a template written by lawyers such as this one from Businessese. Make sure each subcontractor signs this agreement and returns it to you before you begin work with them.
I highly recommend meeting with a lawyer, though, to ensure all your ducks are in a row. It’s hard to templatize a highly variable situation.
IRS forms
For tax purposes, you’ll also need to get your subcontractors to sign a W9, and as of 2018, if you pay them $600 in a calendar year, you’ll need to issue them a 1099-MISC form by early the following year.
Employee vs. independent contractor
Note that the IRS clearly defines differences between an employee and an independent contractor for your business. Be sure to know these rules and stick to them. As an overview, the IRS website states: “The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, not what will be done and how it will be done.” There are a lot of nuances, though, so be sure to read the details on the IRS website.
Even if you categorize someone as a subcontractor, if they are actually an employee based on the IRS rules, you’ll have to pay employment taxes.
As always, talk to an attorney or legal professional to get legal advice that applies to your unique situation.
Subcontract freelance work to scale your business
As a freelancer, you only have so much time to spend on clients. Once you do your research and consider the challenges I mentioned above, you’ll be in a much better position to start outsourcing work. Even with the potential stumbling blocks, subcontracting can be a great way to scale your freelance business.
But don’t take my word for it. Here’s what Miranda has to say about deciding to subcontract her digital marketing and virtual assistance work: “In the end, delivering high-quality work and running a happy team are the two most important things to me, so I’m really glad that I decided to go this route.”
