W2 vs Corp To Corp: Everything You Need to Know
When you work as a consultant and have a choice about how to structure your working relationship with an employer, you may choose between W2, Corp to Corp, and 1099. 4 min read
2. Pros and Cons of W2
3. Pros and Cons of Corp to Corp
When you work as a consultant and have a choice about how to structure your working relationship with an employer, you may choose between W2, Corp to Corp, and 1099. All look the same in terms of the work to be performed, but each have big differences when it comes to the way taxes are handled.
With a W2, although you are a contracted consultant, you will be treated like a regular employee, usually paid hourly every two weeks, commonly through direct deposit. Your employer pays part of your taxes and handles your withholding for social security, Medicare, state, and federal tax. Your employer is responsible for any liability, and can offer benefits including healthcare, paid vacation and sick time, disability, and retirement accounts.
Corp-to-corp is a standard contract arrangement, but to set this up you must have your own S-corp or an LLC. To do this, you'll need around $200 to start out, and will need to file some paperwork. You would also need to file taxes quarterly. An S-corp or LLC sends an invoice for work rendered, and this may require 30 days or more for payment, sometimes as much as 60 days, or even longer. You'll also need to be responsible for all of the taxes — though, due to this tax liability, you should receive a higher rate of pay. You are also responsible for maintaining liability insurance, as well as creating your own benefits package including healthcare and a retirement plan.
Which Relationship is Right for You?
Each relationship — corp to corp, W2, and 1099 — has advantages and disadvantages. You'll need to research them carefully to determine what is most important to you in terms of benefits, liability, and tax payments.
Those who hate doing their own taxes and bookkeeping are generally better off in a simple W2 relationship. On the other hand, if you enjoy doing this type of accounting work and have a background in this area, you may prefer to maintain your own corporation instead. The 1099 is somewhere in the middle, because you will need to keep your own records and pay your own taxes, but less paperwork is required. One caveat, though — 1099 workers are more likely to be audited.
Personal preferences aside, there are rules to follow when determining your work status. This is covered in IRS Publication 1779: Independent Contractor or Employee.
Behavioral control — Does the business havehttps://www.google.com/search?q=w2+vs+corp+to+corp+upcounsel&rlz=1C5CHFA_enUS509US509&oq=w2+vs+corp+to+corp+upcounsel&aqs=chrome..69i a right to direct, or control, how the work is performed? If the answer is yes, the worker is an employee.
Financial control — Does the business have a right to direct the way money is spent while work is performed? If your expenses are not reimbursed, and you can claim a loss or earn a profit, you may be an independent contractor.
Relationship of the Parties — How do the worker and employer view their relationship regarding benefits, paid time off, taxes, and other issues? If benefits are provided and taxes are withheld, the worker is an employee.
If the relationship between worker and employer is not clear, a written contract may be signed by both parties to clarify things.
Pros and Cons of W2
The main reason to choose a W2 relationship is simplicity. Very little bookkeeping or documentation is needed. The employer handles tax withholdings as if you were a regular employee. However, unreimbursed business expenses and healthcare insurance premiums are not deductible. If the company does not provide a retirement plan or health insurance, it may be more expensive for a W2 contractor than a regular employee.
Pros and Cons of Corp to Corp
Many clients prefer corp-to-corp arrangements, because they are protected from many risks involved with hiring employees. You won't need to pay self-employment tax. You can arrange a retirement plan targeted to small businesses, which allow you to defer a larger amount of income than traditional IRAs. However, they are difficult both to organize and to dissolve when the business ends. Some states have a minimum tax that you must pay, even if no profit was made.
Every state has different rules regarding corp-to-corp arrangements as well as LLC and S-corp formation. Before you decide which arrangement is best for you, you should consult with an attorney who is familiar with all business structures, and also see a good CPA to assist with tax planning.
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