Freelancing is on the rise. According to the Bureau of Labor Statistics, more than 15 million Americans were self-employed in May 2015. If you run a small or midsize business (SMB), hiring a freelancer may be the ideal solution to a looming deadline or project outside of your staff's skills. But choosing to outsource work to freelancers isn't always smooth sailing. Here's what you need to know about balancing the potential of outsourcing with the pitfalls of contract work.


As noted by The Next Web, freelancers often demand a higher average hourly rate than full-time employees (FTEs) because they have special skills and access to multiple projects, rather than being tied to your business alone.

According to Dr. William R. Osgood, managing director of the Knowledge Institute for Small Business Development, finding the right price point means doing your homework. "Take the trouble to define the task that needs to be done," he recommended in a recent interview. "Be as specific and comprehensive as possible." This allows you to create a scope of work (SOW) that includes specific costs and timelines to form the basis of a freelance arrangement.


How long should it take to complete a specific project and how often should you pay your freelancers? Dr. Osgood suggests arranging an up-front deposit once an SOW and a clear understanding of deliverables and costs have been established, to be followed by milestone-based payments. With crystal-clear milestones that leave no room for interpretation, you and your freelancers can establish a reliable payment process and project pace.

Problem Solving

Not all projects go as planned. Your best bet to help avoid disaster is a combination of solid communication and oversight. Use a tracking system, such as program evaluation and review technique (PERT) or critical path method (CPM) to not only identify the amount of time required to complete a project, but also to facilitate work sharing and reporting. You can even set up a Google Doc to act as a shared repository.

It's important to arrange meetings between any freelancers and FTEs who interact regularly. Give both parties a chance to address any concerns and help ensure there's always an open line of communication in the event of a conflict or issue.


While hiring freelancers offers a way to complete tasks quickly and reduce overhead, Dr. Osgood points out that the IRS and DOL are cracking down on contract employees who are actually FTEs in disguise. To minimize this problem, make sure outsourced providers are:

  • An LLC, S- or C-corp or other legal entity
  • Covered by their own workers' compensation policy
  • Bound by a clear, written, signed, results-based contract
  • Provided a 1099 at the end of each year

Freelancing is quickly becoming the new normal of American corporate culture. It offers big benefits to SMBs, but mistakes can be costly. You could be on the hook for back taxes and penalties or fines that may equal or exceed these taxes. When hiring a freelancer, be sure to consider pricing, pacing and protection to ensure you maximize the potential of that arrangement. When in doubt, check with your CPA or attorney so you don't run afoul of any laws, including IRS or DOL rules or regulations.

Tags: milestone payments 1099 hiring a freelancer freelancer SBM outsourcing small and midsize businesses IRS