How to hire IT subcontractors
Subcontractors can bring new ideas and productivity to your IT projects, but they can increase risks too. Here’s an overview of what you need to know when hiring subcontractors.
Why you may need subcontractors
You might need to bring on a subcontractor if a client asks you to solve a problem you don’t have the expertise to handle on your own or finish a project on a tight deadline.
For example, a web developer might hire a cybersecurity specialist to build complex security protocols for a client website. Or a freelance software developer might delegate some work to a second developer with the same skill set so they can deliver an application to a client faster.
Learn the answers to common questions about finding the right subcontractor for your project, such as:
What are the benefits of hiring subcontractors over employees?
Unlike employees, subcontractors:
Work independently. You don’t have to spend much time managing subcontractors, since they are responsible for their own work and time. You might have to brief subcontractors on projects and answer their questions, but you don’t need to oversee them like employees.
Have flexible hours. Your employees have set work schedules, while subcontractors can work whenever you need extra help. Save money by hiring subcontractors to handle tasks that only come up from time to time, like network maintenance, system repairs, or data architecture enhancements.
Get paid by the project. It’s hard to know how much time a project might take. Subcontractors often charge by the project, which means you can give an accurate estimate to your client no matter how long it takes.
Require less paperwork. If you have employees, you need to comply with employment laws like OSHA, ADA, FICA, equal pay, minimum wage, and overtime – but these laws don’t apply to subcontractors. Subcontractors require less paperwork and come with fewer tax obligations.
Are easy to let go. It’s never easy to fire an employee. Subcontractors, on the other hand, don’t plan to work for your business any longer than it takes to finish your project. That makes them a much better fit for temporary work.
Why are subcontractors a good fit for small tech companies?
If your small business doesn’t have the resources to hire full-time employees, subcontractors can help you tackle projects and finish tasks that you couldn’t (or don’t want to) handle yourself. Subcontractors can provide:
Specialized skills. Many small business owners are used to taking care of business on their own. But what happens when a client reaches out with a complex project you can’t handle by yourself? Subcontractors can provide the expertise you need, so your business can take on any project.
Contractors can also help you handle business operations like accounting, marketing, and human resources – anything you might not have the experience or time to handle yourself. If you run a small tech company, you probably don’t need full-time employees in these positions. Instead, you can outsource things like social media management to a part-time contractor.
Extra bandwidth. Subcontractors help small businesses take on big projects by increasing your potential bandwidth. If your business’s workload suddenly expands, you can easily pass work on to subcontractors. If you wrap up a few projects and your workload decreases, it’s also easy to scale back. Subcontractors are a flexible workforce that your business can scale both up and down to fit demand from clients.
You can hire subcontractors as a stop-gap measure for big projects or busy periods, or you can use subcontractors as part of a long-term strategy to increase the agility of your business.
How do subcontractors work?
Subcontractors work independently. As the business owner, you can specify what you want done and how much time it should take.
However, subcontractors typically finish assignments on their own, then pass them on to you to review. If you want something changed, you can always ask the subcontractor to revise their code or content. When their assignment is finished you can pass it on to your clients. You’re responsible for negotiating with clients, collecting payments, and disbursing them to your subcontractors.
Where can you find subcontractors?
To find a trusted subcontractor, mine your work contacts or search for the right person online.
The easiest way to find a subcontractor is to reach out to someone you know. Former coworkers and classmates are two great options, since you already know who they are and how they work.
If no one in your immediate network is available, ask people you trust for recommendations. There are plenty of good contractors outside of your network, but businesses often get better (more predictable) results from contractors who come recommended by someone they know.
If you don’t have the right independent contractor in your network, you can often find a good fit online. Websites like craigslist.com, angel.co, indeed.com, and upwork.com are good places to post jobs for IT freelancers. Posts on craigslist.com, angel.co, and indeed.com are usually free, and upwork.com offers a free plan with relatively low payment processing fees.
What steps do you need to take when hiring subcontractors?
1. Identify potential candidates
Finding the right subcontractor for a job can be half the battle. To make sure potential contractors will be able to complete the projects you send their way, you might want to:
Ask for recommendations. A recommendation from someone who’s worked with potential contractors before gives you a feel for their real abilities. Also, if a contractor is organized as a business, check the Better Business Bureau to see if anyone has submitted a complaint.
Do a background check. If your subcontractors need to access sensitive data like financial information or personal records, you probably want to conduct a thorough background check on each potential contractor. If not, a quick Google search can turn up any obvious red flags.
2. Hire the best qualified subcontractor
Once you’ve checked your candidates' qualifications and narrowed your list, it’s time to choose the best candidate. Want to see what kind of results a potential contractor delivers in real life? Test their abilities with a short assignment before you hire them – or hire them for a small project before sending any important work their way.
When you find a subcontractor who has the skills and availability you need for your projects, do what you can to encourage them to stick around. You can hire a different subcontractor every time you need help, but finding new subcontractors is time consuming and risky. It’s often better to develop strong relationships with a few reliable subcontractors.
3. Sign a contract
Before a subcontractor gets to work, it’s best to put together a written agreement and have the contractor sign it.
The subcontractor agreement should spell out the responsibilities of the subcontractor and how much you plan to pay them. It can also include a non-disclosure agreement (NDA) and intellectual property rights clause if the subcontractor will develop confidential or copyrighted material.
A written agreement with a subcontractor might include:
Job responsibilities. List the subcontractor's responsibilities and your expectations for their work. It should be clear that the subcontractor isn’t an employee in case there’s a dispute.
Pay rate. Be sure to include the subcontractor’s hourly or per-project rate, including any upfront payments. Because you’re purchasing a service directly from the subcontractor, tax and wage laws don’t usually apply.
Project deadlines. If you’re hiring a subcontractor for a specific project, include due dates. If subcontractors deliver late work or abandon a project, you or your clients can hold them liable.
A non-disclosure agreement. A non-disclosure agreement prevents subcontractors from sharing sensitive information with third parties – like other clients. This section can also include data protection protocols that outline how subcontractors can store, use, and dispose of data. If your subcontractors need to follow industry-specific security rules, like HIPAA, make it clear.
A work-for-hire clause. When an employee like a software engineer develops intellectual property for a business, the intellectual property rights belong to the employer. That isn’t always the case for independent contractors. If a subcontractor will develop products or content, you might want to include a work-for-hire clause that gives your business intellectual property rights.
Termination. Make sure both you and the subcontractor have a way out of the agreement. For example, you might require a month’s notice from either party to terminate the agreement. If you’re hiring a subcontractor for a temporary project with a completion date, make that clear.
4. Ask for proof of liability insurance
Clients expect you to stand behind your work, and that means they can hold your business liable for any mistakes made by your subcontractors. If your subcontractors don’t carry errors and omissions insurance (E&O), your business may end up paying for their error or late delivery.
Subcontractors should also carry general liability insurance for accidents that cause injuries or property damage. For example, they could leave equipment in a place where a client trips over it, or they could spill a drink on a client’s laptop. If they’re properly insured you won’t end up facing any legal fees.
You may also want to ask subcontractors to buy workers’ compensation insurance, since personal health insurance policies won’t cover work injuries.
Make sure to verify that your subcontractors have adequate insurance coverage. Ask them to send you a certificate of liability insurance that proves their policy is active.
A certificate of insurance is a single-page document with policy details, such as:
- Expiration date
- Coverage limits
A certificate of insurance will also tell you if a subcontractor has sufficient coverage. Subcontractor policies should have policy limits that match or exceed the amount your client requires for the project. Check your project contract for any specific insurance requirements.
Even if you have the certificate of insurance in hand, you may want to check with the insurance company to verify that your subcontractors are up-to-date on their payments.
If your subcontractors don’t have insurance, you may be able to add them to your policies as additional insureds. Or if they’re going to expose your business to new liabilities, see if you can get added to their policy as an additional insured. Check with your insurance agent to find out what makes the most sense.
5. Collect tax information
Your business must collect a completed and signed Form W-9 from every subcontractor. This form includes each subcontractor’s Taxpayer Identification Number (TIN) for your tax records.
Taxes aren’t complicated if you’re working with subcontractors. Independent contractors pay their own Social Security and Medicare taxes, so you don’t need to pay into these funds. You also don’t need to pay unemployment taxes for subcontractors, since they’re not employees.
If you paid a subcontractor $600 or more during the tax year, you need to report their earnings to the IRS using Form 1099-NEC. Be sure to submit this form to the IRS by Jan. 31, and also get a copy of the completed form to the subcontractor by the same date.
What taxes do you need to pay when subcontracting?
Business owners don’t need to worry about payroll taxes or benefits for independent contractors, which is why many businesses prefer hiring subcontractors over employees. Not everyone can be an independent contractor though. Only certain workers are exempt from employment taxes.
It’s important to classify your employees and subcontractors correctly. Misclassifying an employee as an independent contractor is tax evasion, which is a criminal offense. If you misclassify a worker, you could spend up to a year in jail and pay a fine of up to $500,000.
The IRS considers anyone who works for your business an employee, unless you can prove otherwise. To prove a worker really is a subcontractor, you may need to demonstrate that:
Your subcontractors manage their own work. You can’t control the process of your subcontractors, only the results of their work. You can, however, control when, where, and how your employees work by setting specific work hours or asking them to work in your office.
Your subcontractors can work on their own. Subcontractors offer a service that anyone in the general public can pay to receive. Employees are dependent on your business because, for example, you provide them with the equipment and office space they need to do their work.
Your subcontractors are peripheral workers. Your subcontractors might provide essential services, but they aren’t the mainstays of your business. Your employees play essential roles in your organization that might require full-time hours or an indefinite work contract.
If you aren’t sure whether you should classify a worker as an independent contractor or an employee, you can ask the IRS to decide using Form SS-8. If you’ve accidentally been misclassifying employees as subcontractors, you can reclassify your workers by applying for Section 530 Relief. Section 530 Relief helps you avoid harsh legal penalties.
If you’re adding employees to your payroll for the first time, make sure you follow all employment and wage laws – which may mean purchasing workers’ compensation insurance.
While there’s a lot to consider, hiring subcontractors could be very worthwhile. Overall, it’s a convenient way for a small tech company to tackle projects you wouldn’t be able to handle on your own. With the right precautions and insurance, you can depend on their expertise without increasing your risk.