Subcontracting work to others is a practical way for many small businesses to outsource specific types of work, and to keep their overhead low. There are a lot of aspects to it that are not apparent on the surface though. I'll work through Advantages, Disadvantages, Legal Issues, Tax Issues, Liability, Pay Rates, Hiring, Contracts, and Oversight.

Advantages

Hiring employees is a lot of hassle. The federal government requires quite a bit of paperwork, additional tax forms, and payments. Your state government also has employment regulations and procedures which must be followed. If you offer benefits, there is another set of papers to be filled out and payments made.

In contrast, hiring a sub-contractor to do a job involves far less paperwork. You may have a written contract, and you'll need a tax form filled out, but often, that is all.

For small offices, you may not need one full time employee to do certain tasks. Or you may have a range of tasks that need to be done, but cannot find someone who is qualified to do them all. Outsourcing is a good way to acquire skilled services without having to find skilled workers who are willing to do small amounts of work.

Disadvantages

You have less control over how much you pay. Generally when you hire a subcontractor, you'll pay a higher per hour rate. If they have to operate their own business, they'll need more per hour to do the job.

Oversight may also be a problem, because when you are billed by the hour, you may not be able to readily know whether they actually put in the number of hours they bill for. You'll need to establish a relationship of trust.

Hiring also presents some issues, because it can be hard to find people who want to work doing the things you need to have done. Sub-contracting to an established company avoids this, but smaller companies who are just beginning to grow may not need highly skilled work done. For us, finding someone who was willing to do piece work for an affordable rate (which was more than fair) has been very difficult because many people who are capable of learning the job want easy money.

Legality

In order for you to be able to call someone a sub-contractor instead of an employee, they have to meet certain criteria. In general, the following conditions must be met (legality changes on this, so get up to date info from the Small Business Association):

1. They must be informed that they are responsible for the payment of taxes.

2. They usually cannot work using your equipment, and in your office space. Sometimes they may work in your space, using their equipment.

3. They are generally responsible for their own training. A company can provide training, but usually not training and compensation for training time.

4. They must fill out a W-9 form instead of a W-4 form. If you pay them more than a certain amount, you'll have to file that form with the federal government.

5. You cannot offer them standard benefits such as health coverage.

6. They must essentially operate a business that is separate from yours.

If you mess up on this, you can come under investigation by state and federal governments.

Tax Issues

Hiring a sub-contractor is much simpler for the hiring entity, more complex for the worker. But there are still taxation issues which must be addressed.

1. You must have them fill out a W-9 form if you are going to make payments to them of over a certain amount each year. Check current tax law for this amount.

2. You can deduct the amount paid to them as a business expense, as long as the work they did was legitimate.

3. They must file their own business taxes at the end of the year.

4. In order to qualify it as a subcontractor and not an employee, it must meet the conditions set down by the government agency which regulates the taxes involved.

Liability

One of the nice advantages to subcontracting is that you are not responsible for employee liability issues in the same way that an employer is. You are still liable for maintaining a safe work environment if a subcontractor works on site though, and for prompt payment of amounts due.

Pay Rates

A sub-contractor will require more per hour than an employee. This is because they have their own business expenses to pay, and because they may have more highly specialized skills. Since you do not have to pay employee taxes, benefits and insurance costs, it can be more affordable than it sounds. You are also released from the expense of training.

One problem we have faced though is that we do not require highly skilled work. Yet even people who are not skilled will not work even for $20 per hour when the contract involves less than half time work. It has been harder to find people willing to do piece-work than I would have ever thought it could be. Even when we make a position available among people who are actively looking for work at home jobs, we are unable to find anyone willing to actually work for their money. They prefer empty promises of easy wealth.

Pay can be contracted on either a per hour, or per task basis. We always provide flat rate service quotes, because for one thing, we don't like to have to track hours (our day is just too flexible), and because we feel our customers have a right to know up front what it will cost.

Hiring

Hiring a subcontractor involves assessing their experience, credentials, and work ethics. This can be hard to do, and hard to verify. We work with many companies, in situations where we are the subcontractor. We usually exchange a large number of emails and phone calls before a client is comfortable with hiring us for the first time. A relationship of trust should be established in one way or another.

Finding a reputable company, or a reputable individual is very important. Sometimes you hire someone who has to learn the job. You need to make sure ahead of time that they are capable of actually learning it. Free classified listings online are not a good way to find qualified individuals.

Contracts

Sometimes a verbal contract is sufficient. When you pay after the work is finished, and when the work to be done is simple, a formal written contract may not be needed. But any time there are multiple payments, complex details or technical tasks that must be finished in a specific manner, a written contract is advisable.

A contract should specify not only how much is due, and when, but exactly what criteria must be met. By that, I mean, you should not just say, "First payment due when this stage of work is complete." But instead, put in, "First payment is due when this task, this task, and this task have met this criteria of completion." An example of a contract which has this kind of conditions in it is at http://www.adventuretech.us/contract.htm

Oversight

When you subcontract, you need to have a means of knowing whether the work you are paying for is actually getting done. There are a number of ways to do this, and usually a little research or creativity will supply you with a good system to do this.

With our website design clients, we provide them with visual markers to know that certain work has been done. They can see website design progress. We email them copies of search engine registration confirmations, and we provide them with access to site stats. These things help them to be able to check up on us. Any reliable contractor will provide you with such evidences as a matter of course, and will never be offended about it.

With our own subcontractors for marketing, we require them to provide us with URLs where they have placed our links, and other verifications of work completed. This is not showing a lack of trust, it is just part of the business relationship - I show you the work completed to your specifications, you pay me as agreed.

Summary

Subcontracting can be a real benefit to a small business. It is not a way to get something for nothing, nor is it a way to avoid tax accountability. Used wisely though, it can help you to obtain better services, and to contain your operating costs more efficiently.