Consultants: Corp-to-Corp vs 1099
I blogged previously that when you are a consultant or contractor, you can sometimes be faced with the decision when taking a new contract of whether to go 1099 or W-2 (Consultants: 1099 or W-2?). However, some staffing firms or clients don’t do 1099, but instead do Corp-to-Corp (C2C). In short, Corp-to-Corp means that your client, which is a corporation, pays your business, which is organized as a corporation, for the services rendered by you. Your client may prefer this instead of 1099 as it protects them 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. See IRS Publication 1779: Independent Contractor or Employee? and Consultants, know how the IRS determines employee status. If this were to happen, the company you work for would owe back payroll taxes, so some companies prefer Corp-to-Corp to avoid this situation).
I have done C2C a few times when I was subcontracting for a consulting company. You might find clients that have a checklist similar to the one below that you must adhere to in order to do a C2C (some call it an “Independent Consultant” (IC) agreement):
- Is the subcontractor an independently established business registered with or incorporated in one of the United States (as opposed to merely an individual)? DOCUMENTATION REQUIRED IF ANSWER IS YES: Subcontractor must submit copy of Certificate of Incorporation.
- Does the subcontractor possess a Federal/Employer Tax I.D. Number (as opposed to only an individual’s social security number)? DOCUMENTATION REQUIRED IF ANSWER IS YES: Subcontractor must submit copy of formal notification of Tax ID number and completed W-9 Form (attached hereto).
- Does the subcontractor issue paychecks and W-2 Forms to its all personnel (as opposed to business checks and Form 1099s)?
- Does the subcontractor make payroll deductions for its personnel’s federal, state and local income taxes, FICA, FUTA, SUTA and required disability insurance (if any) from its personnel’s paychecks?
- Does the subcontractor file all required employment tax and payroll reports (such as IRS Form 940s and unemployment insurance contribution reports) with the appropriate agencies? You can check indemnity health insurance plans.
- Does the subcontractor obtain Form I-9s for its personnel? Does the subcontractor currently employ the individuals/candidates being presented for consideration with our clients?
- Does the subcontractor currently employ the individuals/candidates being presented for consideration with our clients? DOCUMENTATION REQUIRED IF ANSWER IS YES: Subcontractor must provide proof of employment, i.e. visa if sponsored or other employment documentation.
- Does the subcontractor provide workers compensation coverage for its personnel? DOCUMENTATION REQUIRED IF ANSWER IS YES: Subcontractor must provide proof of coverage via a Certificate of Insurance issued to us.
- Does the subcontractor possess General Liability Insurance coverage?
- DOCUMENTATION REQUIRED IF ANSWER IS YES: Subcontractor must provide proof of coverage via Certificate of Insurance issued to us. (Min. coverage $300,000). Note: Most require 1 million in GL coverage, which you can get for around $400-500/year. I got my coverage from TechInsurance
- Does the subcontractor have workers compensation and auto insurance?
- Does the subcontractor provide similar services to companies other than us, i.e. is the subcontractor free to do business with anyone who may wish to contact it, even while its personnel are performing services for us?
- Does the subcontractor advertise in the Yellow Pages, internet postings (Internet-Monster, Dice, etc), local newspapers, trade publications, or other media? If so, are the services marketed by the subcontractor the same as those the subcontractor will be providing us?
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 do have to pay yourself a salary and with it both employer and employee taxes.
More Info:
Thanks for the blog now i got the difference b/w consultant or contractor…
Pingback:Consultants: 1099 or W-2? | James Serra's Blog
Pingback:Blueprint for consulting riches | James Serra's Blog
Can anyone tell me about how much% payroll services companies charge IT contractors? Also any recommendations of companies that provide tjis CORP to CORP billing/payrolling services to IT contractors?
Thanks
Hi Michele,
I would recommend http://www.mbopartners.com/
Wells Fargo handles my payroll at a cost of roughly $50/month (AKA $0.30/hr).
If I contract on a C2C basis and provide my company’s FEIN, do I also have to provide my personal SSAN to any entity that is not my own company? In other words, will my company’s FEIN suffice given that my company, of course, does have my SSAN and uses the latter to pay me via its payroll? Thanks in advance for your answer(s).
If I contract on a C2C basis, so that my company as the subcontractor provides its own FEIN for payment and other purposes, do I also have to provide my personal SSAN to any entity that is not my own company? In other words, will my company’s FEIN suffice given that my company, of course, does have my SSAN and uses the latter to pay me via its payroll? Thanks in advance for your answer(s).
Great article. Thanks for the info, you made it easy to understand. BTW, if anyone needs to fill out a form 1099, I found a blank 1099-MISC form here http://goo.gl/DvBdLq. This site PDFfiller also has some tutorials on how to fill it out and a few related tax forms that you might find useful.
Pingback:How To Fix 0x8009000b Certificate Errors - Windows Vista, Windows 7 & 8
I have started a consultancy , so want to know how does a corp to corp work.
What are the steps and processes? please guide me on this.
Thanks
Corp to corp simply means that you need to have an entity through which you will conduct business. Typically, you would form an LLC or a corporation and have it elect to be taxed as an S corporation. There are several moving parts, but here’s a high-level of the steps involved:
1. form an LLC
2. obtain EIN
3. File Form 2553 (S corporation election)
4. open business bank account(s)
5. provide Form W-9 to your client(s)
6. set up payroll (to pay yourself)
7. file quarterly payroll reports
8. pay quarterly estimated tax payments
9. stay on top of bookkeeping
10. prepare/file annual S corporation tax return
If you have any questions, don’t hesitate to reach out. I’m happy to help.
Hi. I’m so sorry to be ignorant of this whole corp2corp. I’ve been an IC for 25 years & on occasion I’ve hired subs when work was heavy. However CA passed AB5 Which cause my only client of 15 years to cut me off. I spoke to an atty who said nothing can be done but this sounds like an option. However, idk what it means when you say they pay your company through your business acct & then you pay yourself. If they pay me through my business account that I access, isn’t that MY payment to me? Sorry if this is a stupid question.
Yes, you are paying yourself. I did this based on advice from a good accountant who knows about LLC’s and did this for tax reasons. Find a good accountant who can help you with this.
It’s not a stupid question. Hi Tami, I’m a CPA. After forming your legal entity (usually an LLC taxed as an S corporation), the contract would be between your company and the client. It’s no longer a contract between you and your client. Then, the client pays your company and your company pays you a salary & dividends. It basically just creates a layer between you and your client. This can sometimes satisfy AB5 requirements and can also reduce your overall taxes.
I am contemplating to start a s corp for submitting my profile to companies as c2c. The question is should I form an LLC and then file the form 2553 as indicated above?
More specifically why would one form a LLC instead of S corporation if they have to file form 2553 with IRS.
James: Great articles on W2 vs 1099 vs C2C. Very useful and thank you very much.
The concept of corp to corp came about due to an IRS regulation that required third part service providers in certain technical fields (IT is one of them) to be classified as employees. This happened in the 1980’s.
Why would clients ‘make you’ adhere to a C2C checklist? Does the IRS in any way make the client-firm responsible for an individual who falsely purports to be a corporation?
It’s good “audit repellent”/CYA practice, and weeds out the true professional from the wannabes. A legitimate company would not hesitate to show these items to the client. Most of the time, the *client’s* insurance company needs these things to C their own A. If the sub messes up, who’s gonna pay?
Hi James,
how would this apply say to a Canadian who has a corporation in the USA and is a contractor
Recently there has been a change in the laws in the US where government agencies are classifying contractors as employees. In order to protect the company how can be these below mentioned points be included in the contract.
A. Corp to corp employer attests to having more than 1 employee
B. Few months later the headcount drops to 1 employee
It could be very great if you can share a Draft Clause.
What forms do you use for corp-2-corp?
If I’m misunderstanding your question, I apologize. To do “corp-to-corp”, you must first have an LLC or corporation. Then, you will elect S corporation status using Form 2553. Once that is filed with the IRS, you will provide a Form W-9 to your client(s) that indicates you have an S corporation.
Moving forward, you will be Filing Forms 941, 940, and 1120S in addition to state forms depending on where you live.
I’m Happy to help with any questions you may have.
Can you recommend a good resource for help with calculating C2C per-hour rates? I seek information regarding how to handle travel expenses, in particular.