14 Apr Your Secret Weapon to Profitability: Smarter Hiring with Subcontractors
Remember when you started your business? That gleam in your eye, the conviction that you’d found a better way to serve clients, the absolute certainty that financial freedom was just around the corner?
Then reality hit. Between payroll, overhead, and those unexpected expenses that always seem to pop up at the worst possible moment, that path to profitability started looking more like a maze.
Many newer business owners find themselves in a phase that I affectionately call “profitable on paper, broke in practice.” The financial statements show black ink, but their bank accounts keep flashing red. The culprit? Cash flow management—or rather, a lack thereof.
This is where the Profit First methodology changes everything. Not just how you handle money, but how you structure your entire business—including who you hire and how. Cash flow management isn’t just accounting—it’s strategy. And your hiring decisions are perhaps the single biggest factor affecting that strategy.
For professional service providers—whether you’re a lawyer building a practice, an MSP keeping clients’ systems running, a doctor expanding your medical arts center, a creative agency scaling your client roster, or a trades business growing your team—the conventional wisdom has always been: “Success means employees.”
But what if that’s backward?
What if permanent profitability actually begins with questioning that very assumption?
Let’s dive into why subcontractors might be your business’s secret weapon…and how to use them the right way.
The Subcontractor Advantage: Flexibility Meets Expertise
Running a small business often feels like juggling flaming torches while riding a unicycle. You need help, but what kind?
The Variable Workload Dilemma
I recently talked to a creative biz owner about their summer last year. They had three major projects land simultaneously, followed by six weeks of crickets. Sound far too familiar? It’s the entrepreneurial roller coaster many of us ride. During those feast phases, the business needed a graphic designer, a copywriter, and a web developer – but certainly not full-time, and definitely not all year round.
In professional services and trades businesses, labor typically represents 40-60% of total costs. But here’s where it gets interesting: When you hire employees, you’re not just paying for productive hours—you’re paying for:
- Inevitable downtime between projects
- Benefits and employer taxes (roughly 25-30% on top of base salary)
- Management overhead (someone has to supervise, train, and develop these folks)
- Space and equipment (even with remote work, there are costs)
If you have work requirements that vary throughout the year, subcontractors may be the solution. They allow you to scale your workforce precisely when needed without carrying the overhead during slower periods. You pay for productivity, not presence.
The Profit First Approach to Talent
The Profit First methodology teaches us to take our profit first, then work with what remains. When you apply this thinking to your workforce strategy, a new solution might come to the forefront: Instead of hiring generalists who might be busy sometimes and idle others, can you engage specialists precisely when needed for specific outcomes?
This isn’t about shortchanging talent. Quite the opposite—many of the subcontractors I work with earn more per hour than they would as employees. The difference is that both parties benefit from the arrangement’s efficiency. When you shift from hiring generalists to engaging specialists as subcontractors, you can expect the quality of our work to skyrocket because each element is being handled by someone who lives and breathes that specialty.
Consider these scenarios:
- Your e-commerce site needs optimization, but you don’t need a full-time SEO expert
- You require monthly financial reporting but can’t justify a staff accountant
- Your social media needs consistent content, but not 40 hours worth per week
In each case, a specialized subcontractor brings laser-focused expertise without the commitment of a full-time salary.
The Financial Math That Changes Everything
Let’s get real about the numbers (because in business, they don’t lie).
When you hire an employee at $50,000/year, you’re actually signing up for:
- Base salary: $50,000
- Payroll taxes: ~$3,825
- Benefits: $5,000-15,000
- Equipment/workspace: $3,000-5,000
- HR administration: $1,000-3,000
- Training: $1,500+
That’s potentially $78,325 for someone who might be underutilized during slow periods.
Compare that to a subcontractor who might charge $75/hour, but only when you need them. If you need 15 hours of work weekly, that’s $58,500 annually – with none of the additional costs or commitments.
Plus – and this is one you don’t want to learn the hard way – when the work isn’t there, you’re not facing the gut-wrenching decision of laying someone off who has become part of your business family.
It’s time to get crystal clear on the work you need done and how many hours a week it requires. Once you know what you need, you can compare the costs and benefits of hiring a full-time employee versus working with a subcontractor who has expertise in one area and feel confident about the decision you make for your biz!
Playing by the Rules: Keeping Your Subcontractor Relationships Compliant
Now for the part that keeps my attorney and accountant happy: compliance. The IRS doesn’t share our enthusiasm for flexible work arrangements unless they truly qualify as independent contractor relationships.
The Control Factor: What You CAN and CANNOT Do
Looking at the IRS rules that differentiates employees from subcontractors, the main theme is control. The less control you exercise, the more likely your subcontractor relationship passes muster.
Here’s what you CAN do with subcontractors:
- Set deadlines and deliverable specifications
- Require quality standards for finished work
- Request periodic updates on progress
- Pay by project, milestone, or results
Here’s what you CANNOT do without risking reclassification:
- Dictate specific work hours or where they work from
- Provide training on how to perform their core services
- Supply all equipment and tools needed for the job
- Prohibit them from working with other clients
- Treat them as an integral, permanent part of your operation
The fundamental question is: Are you controlling the “what” (generally okay) or the “how” (dangerous territory)?
Red Flags That Attract IRS Attention
Through my network of fellow entrepreneurs, I’ve heard horror stories about IRS audits triggered by contractor misclassification. The common red flags include:
- Treating contractors identically to employees
- Having long-term contractors performing core business functions
- Requiring exclusivity when contractors should be free to work with multiple clients
- Providing standardized training that indicates an employment relationship
The penalties can be substantial, including:
- Back taxes (including the employee portion you should have withheld)
- Interest and penalties
- Retroactive benefits obligations
As an accountant might tell you, the money you save by incorrectly classifying someone doesn’t look so good when you multiply it by 1.5 and add legal fees.
Finding the Sweet Spot: When Subcontractors Make Sense
After some trial and error and based on stories from within my community of entrepreneurs, I’ve developed some guidelines for when subcontractors make more sense than employees:
Subcontractors are Perfect for Specialized Expertise
When you need specialized skills that don’t justify a full-time position, subcontractors shine. For instance, rather than trying to hire unicorns who know everything (and paying accordingly), a Managed Service Provider might build a network of subcontractors who specialize in specific areas like cloud migration, security compliance, and network configuration. Their expertise in just one area exceeds what a generalized employee could deliver.
Subcontractors are Ideal for Cyclical or Project-Based Work
If your business experiences predictable busy periods or undertakes distinct projects with clear endpoints, subcontractors allow you to expand and contract your workforce accordingly. This works well for many law firm’s, who know all to well that the feast-or-famine cycle of case workloads can wreak havoc on profitability. Attorneys might consider maintaining a small core team while relying on a network of specialized subcontractors for document review, research, or drafting standardized motions and briefs.
Subcontractors are a Smart Solution for Testing New Services
Before committing to a full-time hire for a new service offering, use subcontractors to test the waters. For example, if you’re a creative agency considering adding video production to your services, try partnering with an independent videographer first. This will allow you to refine the offering before making a permanent investment.
Subcontractors can act as the Small Business Owner’s Relief Valve
For small business owners wearing countless hats, strategically offloading specific functions to subcontractors can prevent burnout. I have clients who resisted delegating their bookkeeping for years until finally engaging a specialist (me!). The relief was immediate, and the work was much more reliable than their stressed, midnight reconciliations.
Looking Ahead: The Future of Work
This is just the beginning of our exploration into working with subcontractors effectively. If you’re convinced that subcontractors might be the right solution, stay tuned! Next month we’ll be sharing tips to ensure you set yourself (and your subcontractor) up for success: including paperwork, contracts, and new compliance laws. We’ll dive deeper into compliance documentation and logistics for managing your contractor relationships smoothly.
What I’ve discovered through years of implementing these strategies with service businesses across the country is that this isn’t just about financial engineering—it’s about business liberation. When your talent strategy aligns with your cash flow realities, you can finally get off the revenue roller coaster.
By strategically engaging subcontractors instead of defaulting to traditional employment, you’re not just managing expenses—you’re creating the foundation for permanent profitability.
What contractor relationships have transformed your business? Where are you struggling to make the math work? I’d love to hear your experiences in the comments below!
