I run my photography website with a VPS, but I'm looking to expand my offerings through a third-party photo hosting service Pixieset. Pixieset allows users to connect their Pixieset account/galleries to a custom domain so that clients don't have to visit two different websites/feel like they're "leaving" the photographers website.

For the sake of example, my website URL is example.com. Let's say I create a subdomain galleries.example.com connected with Pixieset.

My question is, will linking visitors to this external host as a subdomain from my own website via menu link result in SEO penalties for linking externally? HostGator says "Your subdomains will be treated as entirely separate websites in the eyes of Google.?" (source: https://www.hostgator.com/blog/what-are-subdomains-affect-seo/)

HostGator is wrong. Subdomains are not inherently bad for SEO. Google usually treats them as part of the same site as the main domain. See Do subdomains help/hurt SEO?

If you actually watch the Matts Cutts video on the HostGator page, Matt Cutts doesn't say that that subdomains are bad. He says that Google previously treated them as separate, but now Google usually treats them as part of the main site. Matt says that you can use subdomains or folders, whichever makes you happier. Either way will be fine with Google.

I recommend using a subdomain for hosting part of a site with a separate company from the one that hosts your main site. The alternative is running a reverse proxy to copy the content to your main site dynamically. A reverse proxy is slower and can introduce duplicate content problems. For SEO, I would prefer the subdomain.

In any case, Google won't penalize your main site. In the worst case Google might see your photo gallery as separate content on a separate site.

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