How to Prevent Foul-ups with Freelancers

By Joe Taylor Jr. | Posted February 07, 2013

Programmers, project managers, marketing professionals, and other independent contractors help fill the gaps in skills and labor that entrepreneurs can't always handle in-house. Yet, contracting with freelancers can lead to both legal and productivity problems. Here's what you need to know to ensure a positive outsourcing experience.

4 Outsourcing Tips for Small Business

1. Understand the difference between employees and contractors

Some small business owners mistakenly assume that they can hire a freelancer to avoid the expense and paperwork of hiring an official employee. The IRS can consider your freelancer an employee:

  • If you require a freelancer to work exclusively on-site or if you set regular work hours
  • If you reimburse your freelancer for most of their expenses or if you pay for their health care
  • If you require your freelancer to complete mandatory job training

According to IRS guidelines, contractors set their rates high enough to absorb the costs of tools, training, and routine expenses. Break the rules, and you could be on the hook for Social Security deductions, overtime wages and federal penalties.

2. Set clear guidelines in writing before you start

Protect your business (and your sanity) by signing a written agreement with your freelancer at the start of your project. Your contract should contain a "scope of work" that outlines exactly what you expect your freelancer to deliver and on what schedule. The outsourcing agreement should also include "circuit breakers" that require your contractor to check with you before exceeding planned budgets.

3. Keep your financials organized

Respondents to a Freelancers Union survey said that they often wait as many as 52 days to get paid on invoices, even when clients agree to Net 30 terms. Small business owners and freelancers all understand the challenges of keeping cash flow moving. However, failure to pay your contractors on time can lead to serious consequences, such as losing "work for hire" classification on project output.

4. Discuss timelines and milestones

Experienced freelancers enjoy the flexibility of moving from project to project. In some cases, freelancers choose to work for themselves so they can enjoy the freedom to travel, spend time with family, or pursue seasonal hobbies. Likewise, many business owners rely on independent contractors to help out with specific projects or to ease the burden during busy periods. Failing to understand your freelancer's schedule or their other commitments can leave you hanging at a critical point in your project.


Only about eight percent of freelancers say that they intend to return to full-time work. Meanwhile, more than a third of freelancers say that referrals drive most of their business. When you follow these four best practices, you should enjoy a smooth working relationship with the kind of contractors you'll be proud to refer to your professional network.

Joe Taylor Jr. has covered personal finance and business for more than two decades. His work has been featured on NPR, CNBC, Financial Times Television, Fox Business, and ABC News. He recently completed a personal finance book entitled The Rogue Guide to Credit Cards; (Rogue Guide Books, 2012).

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