Top Ten Advantages to Outsourcing for Small Business Owners and Entrepreneurs

As a small business owner or entrepreneur, you’ll find a number of advantages to outsourcing those business needs that can – and often do – distract from your focus and strengths. If you’re committed to building and scaling your business, it’s smart to shift some of the workload to freelancers and independent contractors.

If you’re just starting to wrap your mind around the idea of outsourcing, the internet provides a number of lists that will give you some quick and easy ideas for what can be outsourced in your small business. These lists can be helpful to get your mental wheels turning, but if you want the most value from your outsourcing efforts, you’ll want a strategy that guides what you do (and don’t) outsource.

At a very basic level, what and why you outsource depends largely on the sort of business you have. If you’re a service provider, such as a consultant, tax advisor, life coach, etc., your needs are much different from a business that provides products. Likewise, the size and makeup of your existing team affects decisions about what and why to outsource. And finally, your individual strengths and priorities should be taken into account as well. All of these things (and more) contribute to a well-planned outsourcing strategy that is unique to you and your business.

Individualized plans aside, take a look at these primary advantages to outsourcing that generally apply to most businesses. You’ll find that some of these are very practical and straightforward while others are influenced by your outsourcing strategy.

General Advantages to Outsourcing:

  • Payroll Taxes. When you assign work to freelancers and outside contractors, you don’t have to pay social security, payroll taxes, or FICA on those “workers.”  Both the Internal Revenue Service and Small Business Association make it clear that Independent Contractors are responsible for payment of their own taxes. You must provide an IRS Form-1099 to any Independent Contractor to whom you have paid at least $600 for services taken together. The contractor uses the Form-1099 to report his/her taxes. The contractor is also responsible for paying the full burden on Medicare and Social Security – where applicable.
  • Employee Benefits. Likewise, Independent contractors don’t earn vacation, sick, or holiday hours, and they’re not eligible for employee group benefits. The Fair Labor Standards Act (FLSA) spells out the obligation an employer has to employees with regard to non-discretionary benefits like breaks and meal breaks. Freelancers are not eligible for the paid vacation, sick, and holiday hours earned by employees at most employers. And, group benefits like medical, dental, and vision insurance may not be paid to contractors without jeopardizing their “independent” status. And, once you start treating a contractor with employee benefits, you assume other liabilities – don’t do it.
  • Employment Policy. While your relationship with the freelancer may be a contractual one, the Federal Labor Standards Act, Family and Medical Leave Act (FMLA), or similar human resources legislation don’t govern their work. FMLA eligibility applies only to those classified as “employees.” Independent Contractors are also not eligible for leave for Jury Duty, Election Day, or similar benefits afforded to employees. And, they’re precluded from receiving overtime or premium pay as defined by the FLSA because of their “independent” designation.
  • Workers’ Compensation Insurance. Your business’s commercial liability insurance may cover Injuries or illness incurred by contractors while on your premises, but they’re not covered by Workers’ Comprehension insurance. You don’t include them under your Workers’ Compensation Insurance policy, and they’re not eligible for the benefits under that policy. If injured while working under contract to you, they may not claim medical, therapeutic, or disability income benefits.
  • Unemployment Insurance. These contractors don’t contribute to unemployment insurance, and they may not enter unemployment claims against your business. Employees don’t pay into unemployment benefits; only the employer pays. But, Independent Contractors are not designated as employees. If a freelancer applies for unemployment insurance payments with the Unemployment Insurance department in his/her respective state, the agency will decline the claim.
  • Equipment and Supplies.  When hiring an employee, it’s your responsibility to provide the equipment, supplies, software, etc. that the employee needs to perform his or her responsibilities.  Not so with freelancers and contractors, who are running their own businesses.  In most cases, the cost of equipment and supplies is the responsibility of the freelancer (although sometimes special circumstances will present themselves – be sure it is addressed in your contract).

Specific Advantages, depending on your Outsourcing Strategy:

  • Expertise. Freelancers and Independent Contractors offer an expertise you don’t have. Most of you have a good sense of finances, human resources, information technology, and other business operations. But you’re probably not a specialist in these support areas, so contracting for that expertise is a wise move. Having outsourced such special expertise, you’re relieved to build your business on your strengths. However, you also learn from your interaction with the contractor.
  • Efficiency. Shifting work tasks off your desk not only gives you more time to spend on what you do the best, but it also speeds the process and its effectiveness by placing it in the hand of the expert. Because most contractors are focused on specific operations, they’re likely to be more efficient in their work processes.
  • Flexibility of Commitment. None of the commitments you agree to with a provider last longer than the period covered by your contract. It will always be your decision to change, renew, or end the relationship. If your need changes or your satisfaction declines, there are no regulatory barriers to your terminating the service. You can contract for continuing services like accounting or payroll, or you can assign specific projects with end dates. The choice is yours, and most freelancers will offer to design a contract to fit your needs.
  • Budget Controls. Because you control the assignments and chores, you control the budget. When you consider outsourcing your needs, you’ll find a number of options. Negotiations with a provider may let you pay a flat fee for an assigned project, a regular monthly fee for a defined service, or a retainer that allows you to call on support at your will. Budgeting creates a metric for performance, productivity, and return on investment. Of course, outsourcing will be an added expense, but when budgeting, you must consider the benefits afforded by the time saved and the quality of the outcome.

Clearly, these more Specific advantages assume a level of success and satisfaction that depends not only on your strategy, but also on the experience, reputation, and trustworthiness of the provider. While I think the move to outsourcing is prudent (and almost inevitable) for small business owners, don’t make the move without research and planning.

Additional reading: (1 Jan 2008). The Benefits of Outsourcing for Small Business.

Jane, M. What are the Benefits of Outsourcing for Small Businesses?

Mielach, D. (4 April 2013). Outsourcing Frees Small Business Owner to Focus.

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