As a contractor, subcontracting work is a good way to take some of the work off your plate
It allows you to continue expanding and taking on more work – with more potential profit – without an unrealistic workload for yourself. But one of the most common questions about using a subcontractor is: how much should a contractor pay a subcontractor?
Pay them too much and you’ll be eating away at your profits. Pay them too little and you could compromise the standard of work and face a revolving door of subcontractors. Read on as we take a closer look at subcontracting and how much you should pay.
What you should know about using subcontractors
First of all, there’s plenty of important information to be aware of when deciding to use a subcontractor for your work. According to HMRC, contractors who do this are classed as employment intermediaries. In 2015, HMRC issued guidance for contractors outlining their financial and legal responsibilities when dealing with other contractors or freelancers. These include ensuring that the correct tax and National Insurance Contributions are being paid.
What is an employment intermediary?
An employment intermediary is a person or a business that arranges for someone else to work for a third party. According to HMRC:
‘You’re an employment intermediary if you supply workers to work for an end client or another employment intermediary, and the client then pays you or someone connected to you for the worker’s services. The end client is who the worker does the work for.’
Contractors are classed as employment intermediaries or employment businesses as they provide the link between the end client and the other worker or subcontractor. Contractors generally have overall responsibility for a task or project. They also dictate which part of a project the subcontractor will be working on. It’s also standard for the contractor to be paid the full amount from the end client when a project is completed. After this they will pay the subcontractor for their share of the work.
Risks of subcontracting
While subcontracting can be an effective way to take on more clients and earn more income by sharing the work, there can be disadvantages. One of these is responsibility for unpaid tax and debts. When acting as an employment intermediary, according to the IR35 legislation, contractors take on employment rights and debt transfer risk. If you use a subcontractor and they don’t pay the correct amount of tax and National Insurance Contributions, you are responsible for the debt.
How much should a contractor pay a subcontractor?
That’s the basics of using a subcontractor covered. Now onto how much a contractor should pay a subcontractor. The answer to this is that there isn’t really a one-size-fits-all solution. The amount that a contractor decides to pay a subcontractor or freelancer can depends on a few factors, including:
When deciding to use a subcontractor, you should always have a plan in mind for their work. This should cover what they will be doing and how much responsibility they have for the overall project.
Let’s say a client has asked you to design a website complete with content on every page. You may decide to outsource the writing element to a subcontractor, which is just one component of the overall project. On the flipside, if you subcontract the whole project, including web design, you will be giving them more responsibility which typically means a higher cost.
You may also have an idea in mind of how long it may take but you can discuss this with a subcontractor. The amount of time required is also an important factor if they have an hourly rate for their work as standard. If you are happy with their hourly rate, you could just agree to pay them for however long it takes.
Something else to consider is how skilled the subcontractor is. An expert in their field may take less time to complete projects, but they may also command higher pay for their skills and experience. Likewise, if you hire a more junior subcontractor, they may be more flexible on cost for a project or have a lower hourly rate. However, this could potentially mean that they take longer, or there are still issues when they have completed their task.
Whether you decide to choose an expert, a mid-weight subcontractor or someone at a junior level is your choice. It also depends on your budget and the level of experience that you think the project will require.
Depending on the industry that you work in, there may be other factors to take into account. These can include tools needed to complete a task or industry standards. In the construction industry for example, contractors also need to be registered with the Construction Industry Scheme when using subcontractors. This scheme outlines how payments to subcontractors in the construction industry must be carried out and details if any deductions need to be taken.
Of course, industry is also a good way to gauge a ‘going rate’. Speak to a few different contractors within your industry, or the industry you need to subcontract within, to get a better idea of the norm. That way, there’s less chance of a contractor charging over the odds and getting away with it at your expense.
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