What Is Corp To Corp Rate: Everything You Need to Know
There are several reasons for choosing to do this instead of working as an independent contractor with a 1099, or an employee with a W2. 4 min read
2. Is Corp to Corp Right For You?
3. What's In It For Employers?
4. Setting Up Your Corporation
What is Corp to Corp Rate?
If you've ever asked yourself, "What is Corp to Corp Rate," in a nutshell, “corp to corp” means that a corporation is paying your corporation instead of paying you directly as an individual. For this to take place, you need to have an LLC or a corporation set up for yourself. There are several reasons for choosing to do this instead of working as an independent contractor with a 1099, or an employee with a W2. The most important reason is the corp to corp rate — higher pay.
As of 2012, a person who would be paid $100K per year, not counting any benefits, would be paid around $109K with a corp-to-corp rate. Even with no benefits, a W2 employer still pays FICA taxes, which add up to about 7.65 percent of an employee's wages, as well as unemployment insurance fees.
There are some tax advantages to you, by working as an S-corp. For one thing, W2 employees can't claim tax deductions related to healthcare, medical, and dental expense until those expenses reach 7.5 percent of their salary. With an S-corp, you can take this deduction and lower your taxable income significantly.
The same is true for job expenses and certain other expenses, and also IRA contributions. A W2 employee may only contribute up to $5,000 per year, while a recipient of corp-to-corp compensation can contribute up to 25 percent of their income. Also, if you are the only member of your S corporation, you can defer your salary up to $16,500 by paying it into your retirement plan instead.
Is Corp to Corp Right For You?
When deciding whether to accept corp-to-corp compensation or a W2 employee's salary, you must do some calculations. Some of these considerations are as follows:
- Social security/Medicare taxes, as well as disability/unemployment tax
- Your income tax bracket
- 401(k) contributions and employer matching, which corp-to-corp employees do not receive
- No paid sick or vacation leave for corp-to-corp employees
- Any downtime you may encounter between contracts, which will be unpaid
- Health insurance expenses, which you must pay yourself as a contractor
Aside from money, you should consider your own personality and abilities. A W2 employee relationship is the simplest to manage, of course, with a 1099 contractor status being more complex, and corp-to-corp being the most complicated of all. If you hate doing taxes and other accounting work, you may find that any tax savings you receive with corp-to-corp are not worth the trouble. However, if accounting is an activity you enjoy, setting up your S Corporation and maintaining it may be well worth the effort.
What's In It For Employers?
You may wonder why an employer would prefer paying your business, which is set up as a corporation, rather than paying you as a regular W2 employee. One reason is that this set-up protects the employer, which is commonly referred to as a client, from many of the risks they face by hiring employees. It reduces their risk of audit from misclassifying employees, such as calling an employee a contractor when it's clear they have a full-time employee relationship. Also, employees have rights that independent contractors do not have. Businesses that hire W2 employees are required to provide them with an array of benefits, which is not necessary with contractors or separate corporations.
Setting Up Your Corporation
In order to work corp-to-corp, you'll need to set up your own S Corporation or LLC. Every state has different rules about how this is done, so check with the Secretary of State or other government agency in your area. Each state has its own tax regulations, too. Be sure you are familiar with these before you begin the process.
As a corporation, you will need to take care of a lot of record keeping you would not have as a W2 employee. This includes tax information; you need to keep track of your income yourself. You will need to send your clients invoices for work rendered. These may take 45-60 days for payment, so be prepared if you need to wait. You'll need a separate checking account to deposit the checks you receive, rather than depositing them into a personal account. Keep all written records, including receipts.
There are many other considerations that go into your choice to accept a corp-to-corp rate of compensation, and only you can decide if you're ready to accept this responsibility in return for potential tax savings and higher pay.
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