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I'm a freelance graphic designer that is hiring freelance help to get some of my overflow projects done.

I'm trying to figure out how much to pay them. This may be a dumb question... but will I still need to pay taxes on the income I generate from their work--and then turn around and pay to them?

I charge $75/hr and was thinking of paying my freelancer $50/hr. But I'm worried that I'm actually going to lose money after taxes are considered (Roughly 40% of my income goes to taxes) I know there is a tax write-off for money spent on hired help... but, not sure if that would mean I don't pay taxes on what I pay them?

Anyone have any insight? I'm in Michigan, and freelancing without an LLC (at the moment... just started). I also need an accountant. I know. :)

Thanks!

  • The money you transfer to the subcontractor is deduced as costs from your own income, and taxes will decrease in proportion. (The rest of the taxes is paid by the subcontractor himself, be reassured.) – Harry Cover Oct 10 '15 at 15:46
  • Thank you for your comment, Harry. I'm so glad this is the case! – jmscogin Oct 13 '15 at 21:23
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You can keep a minimum of 30% of the amount you charge for yourself, ideally on the net profit. That's a safe number that should cover some extra expenses or revisions you haven't planned, and your time for managing the projects.

The other thing to consider... Start a bit lower than $50/hr if you are paid $75/hr and raise the freelancer based on performance and how much energy they require you to manage them.

Some people need to be micro-managed and this means more work for you. Some people will work slower than you,some won't finish the projects or will require you to review their work because they're negligent or not attentive to details or let you down, etc. AND the time you'll spend finding your candidate will also cost you your own time; youmight end up re-doing whole projects that were already paid! You'll probably (certainly) try a few freelancers before finding a pearl and one you can count on. Working with another freelancer is unfortunately not as efficient as if you could simply clone yourself, and you need to calculate that loss in the percentage you'll decide to give them; count this as a global loss.

Your accountant won't really help you on this (eg.profit) but if you can find someone who manages employees, you could get good advice from that person.

Look at the market and average hourly rate, create a table of hourly rates based on experience and skills. Not all freelancers are worth the same and you can't pay a freshly out of school designer the high price since they will cost you a lot of money while you train them! A junior should get less than a senior, and if they have other useful skills(eg. web dev, prepress, SEO, marketing, editing, etc.) then that can be rewarded too.

For the taxes, you usually get a tax credit but you still need to count this as an expense when calculating what you should give to the freelancer.

  • Thank you for the excellent insight! Truly appreciated. After further digging, I have found that the tax deduction for hiring contractors does cover their fees 100%. So, that's a huge relief. The considerations about how much to pay based on talent, is smart. In this particular case I'm hiring someone I have worked with before and know, so hopefully that won't be too much of an issue. Thank you so much for your comment! – jmscogin Oct 9 '15 at 14:57
  • @jmscogin Glad it helps! Yes you're right, 100% deductible. For this you should meet an accountant indeed, he/she will tell you about all this; there's lot of things that are deductible and you'll realize it's worth investing on things that improve your workflow and comfort instead of spending that money in taxes. That can even be part of the bonuses you can offer to freelancers. For example, paying their Adobe subscription and other services might actually benefit you at the end of the year, and benefit the freelancers as well. That's great if you found someone close, good luck with all this! – go-junta Oct 9 '15 at 15:22

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