Corp To Corp: Everything You Need to Know
“Corp to Corp” (C2C) merely implies that as an alternative to paying a person, another business will pay an LLC or corporation for your services.4 min read
2. Income Opportunity
3. Building Skills and Contacts
4. Consultants: Corp to Corp versus 1099
5. Technical Consulting Taxes: W-2, Corp-Corp, 1099
Updated June 23, 2020:
What Does Corp To Corp Mean for an Independent Contractor?
"Corp to Corp" (C2C) implies that as an alternative to paying you, a person, you'll need to have an LLC or corporation that another business will pay for your services. In this method, their "corp" might be paying your "corp" as an alternative to paying you personally. Corp to Corp implies that you must own a corporation, an LLC, or an S-corporation. Employers favor corp to corp arrangements for three main reasons:
- It trims employment taxes.
- It cuts employment dangers (it's tougher to sue in a C2C relationship).
- It reduces the chances that the employer might be audited for worker misclassification.
Some of the advantages to being an independent contractor with a corp to corp arrangement include:
- Increased pay, as most C2C preparations generate a pay increase of 10 percent+ over W-2 salaries.
- Leverage your business for tax savings that you simply couldn't have as a W-2 worker or a sole proprietor.
- You will have your own individual enterprise.
- Hire different workers to do the work.
- Stack contracts.
- Earn a living from home.
- Having a corporation can shield you in the chance of a lawsuit, money owed, etc.
Consultants typically earn higher wages than their salaried counterparts — this consists of independent contractors working corp to corp. By pursuing a variety of contracts, consultants are capable of speeding up their income potential while gaining access to new opportunities and business contacts. Corp to Corp consultants wouldn't have payroll taxes deducted from their paychecks, giving them quick access to their earnings for spending or investing. One distinction to notice with such an arrangement is a higher degree of accountability on the consultant's side to pay all of his or her personal taxes due. Working with an accountant could be a big help to corp to corp consultants.
Building Skills and Contacts
Consultants typically work on initiatives that require specialized abilities, quick turnaround, and high-level area data. Since many firms can't meet all their needs with existing personnel, consultants have access to a wide range of opportunities. As mentioned earlier, pursuing employment alternatives gives independent contractors access to a wide range of organizations, administration types, and business contacts.
Consultants: Corp to Corp versus 1099
You may prefer a corp to corp arrangement instead of a 1099, as it protects you from the risks regarding the employer-employee relationship. Even though you are paid via 1099, the IRS might still consider you an employee and disallow your independent contractor status. The major difference between C2C and 1099 is that with C2C, you don't have to pay self-employment taxes on your income. However, you must pay yourself a set salary, as well as pay all required employee and employer taxes.
Technical Consulting Taxes: W-2, Corp-Corp, 1099
At their most basic level, the three consulting tax relationship types (W-2, Corp-Corp, and 1099) seem identical. Nonetheless, there are variations in how some of these tax relationships affect the individual.
With the W-2 tax method, you're working as a consultant on a contract basis. W-2 contractors basically have an identical setup as a full-time employee except they are hired on a brief, contract foundation. You might be paid a per-hour fee every two weeks by way of direct deposits or by another method, depending on the employer's standard procedures. Your employer pays part of your taxes, such as federal, Social Security, or Medicare, which is often about 8-9 percent. Moreover, your employer withholds a part of your paycheck to go toward your income tax payments.
You might be given employee compensation, and the employer is liable for any legal responsibility. You'll probably be eligible for some advantages, such as important health care protection.
As a full-time employee, it's important to keep up with the basics of bookkeeping to avoid tax issues. Employers pay half of the FICA or Medicare and Social Security taxes for W-2 employees. Independent contractors are responsible for 100 percent of these required taxes. Additional perks of working as a W-2 employee include paid time off, health care benefits, 401(k) and retirement options, and other benefits.
Corp to Corp
With corp to corp, you're a normal contractor. You have to be an S-corp or LLC, which needs some paperwork and a little money to start out. There are some small legal hoops to jump through. For example, you will be responsible for quarterly tax filings. You might be paid month-to-month; your S-corp or LLC invoices the company, which usually offers invoicing inside of 30 days. Sadly, this implies you may go as much as 60 days before receiving your first payment.
The consultant is responsible for paying any required taxes. Tax rates are higher for consultants, due to tax liability. FICA and Social Security are calculated differently, which reflects the higher tax rates. Liability and liability insurance fall under the responsibility of the contractor's LLC or S-corp. Since you own the business, you can create a benefits package that works for your needs. The corp to corp relationship also offers the option to customize your retirement plan, as well as several other key benefits.
In order to work as a 1099 contractor, the first step is to create a business that is not incorporated. This business entity will not exist independently of you, so you don't need separate bank accounts. If a 1099 contractor doesn't pay taxes, the IRS may go after the employer and hold the company liable for the tax requirement. However, the contractor is legally obligated to pay his own taxes as none are withheld from his pay. In order to avoid legal liability, many 1099 contractors choose to take out insurance policies.
If you need help with a corp-to-corp relationship, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.