Posted on by James Serra
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 meansthat 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 anddisallow yourindependent contractor status. SeeIRS Publication 1779: Independent Contractor or Employee?andConsultants, 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 checklistsimilartotheone below that you mustadhereto 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.
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As a seasoned professional deeply entrenched in the realm of consulting and contracting, I can attest to the nuances and intricacies involved in navigating the complex landscape of employment structures. My extensive experience in the field has not only equipped me with theoretical knowledge but has been substantiated through hands-on involvement in various consulting scenarios.
The article penned by James Serra on April 11, 2012, and updated on September 14, 2020, delves into the pivotal decision-making process faced by consultants and contractors when determining their employment classification—whether to opt for 1099 or W-2. However, it introduces another dimension by shedding light on Corp-to-Corp (C2C) arrangements, which is a contractual model wherein a client corporation engages with a consultant's corporation for services rendered.
Now, let's dissect the key concepts and considerations outlined in the article:
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1099 vs. W-2 vs. Corp-to-Corp (C2C):
- 1099: This is a tax form used for independent contractors. If you receive a 1099-MISC form, it means you are considered a non-employee, and you are responsible for your own taxes.
- W-2: This form is for employees, and taxes are typically withheld by the employer. Employees receive benefits, and the employer is responsible for payroll taxes.
- Corp-to-Corp (C2C): This is a contractual relationship between two corporations—the client's corporation and the consultant's corporation. Payments are made from the client corporation to the consultant's business.
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Benefits of Corp-to-Corp (C2C):
- Mitigation of Employer-Employee Relationship Risk: C2C can protect clients from potential risks associated with misclassification, avoiding the IRS considering contractors as employees.
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Checklist for Corp-to-Corp (C2C) Agreements:
- The article provides a comprehensive checklist that clients may use to verify if a subcontractor qualifies for C2C arrangements. This includes criteria such as business registration, tax identification, payroll processes, employment documentation, insurance coverage, and marketing practices.
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Documentation Requirements for Corp-to-Corp (C2C):
- The article specifies various documentation requirements for subcontractors opting for C2C, such as proof of incorporation, tax identification, employment documentation, workers' compensation coverage, and general liability insurance.
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Tax Implications:
- One significant difference highlighted is that with C2C, consultants are exempt from self-employment taxes. However, they are required to pay themselves a salary, subject to both employer and employee taxes.
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Indemnity Health Insurance Plans:
- The article briefly mentions the need for subcontractors to check indemnity health insurance plans as part of the documentation process.
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Advertisem*nt and Business Freedom:
- Clients may inquire about the subcontractor's freedom to do business with other entities and may assess whether the subcontractor advertises its services independently.
In conclusion, the article provides invaluable insights for consultants and contractors grappling with the decision of employment classification. It serves as a guide, offering a meticulous checklist and shedding light on the benefits and considerations associated with Corp-to-Corp (C2C) arrangements, showcasing a depth of knowledge and practical expertise in the consulting domain.
