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W2, 1099, or Corp to Corp?

I am negotiating 6-12 month consulting gig.  I will be going through a vendor, and negotiating with them, not the client.  I'll be functioning pretty much as an employee, i.e. 40+ hour weeks, no billing hassles. 

The vendor is willing to let me work as either 1099, W2, or Corp to Corp.  So my question is, which tax situation would be best for me, and how would I adjust the rate based on that?

I am married, live in So Cal, combined pretax income of about $160k/yr (she works as a W2 FTE), I get gold-plated healthcare through my wife's employer, we don't own a home.  All my work is on-site.  If I were W2, I'd have access to a 401k, though no matching of course.

The other wrinkle is that my father has his own corporation for his business and might be willing to let me invoice through him, which I guess would save me the incorporation fees.  Anyone have an opinion on this arrangement?

What do you guys think?  W2, 1099, or Corp to Corp?  Moreover, what should my target rate be?  If I'm getting 60/hr as a W2, what's a comparable rate as a 1099 or corporation?
anon for this
Monday, April 10, 2006
"I'll be functioning pretty much as an employee..."

Note for your own protection that if you are billing as 1099 or corp-to-corp and acting like an employee you can get penalized big time by the IRS.

Check out http://www.synergistech.com/20qs.htm for more information.
Monday, April 10, 2006
I had to go through a similar scenario, but I live in Canada, so it would be a bit different.  However, I was able to incorporate a business on-line for $200 through the government of Canada, so I am not sure if the US gov has a similar in-expensive way to do that.

After doing my taxes this year, there does appear to be better benefits in incorporating, such as how expenses are used, but since I am not from the US, I don't think my experience applies.
J. B. Send private email
Monday, April 10, 2006
You're an employee of the headshop that is billing you out to its client.  You should go W2 here.

- You will be working on-site.
- You will probably have to shop up to work at a certain time.
- You will be subject to "authority" by the project lead at the site where you will work.

In other words, you don't control your situation.  There have been many precedents that this is an employment situation, not an independent contractor situation.

As for billing through your father's corporation, that muddies things even more if you do it.  He will end up paying taxes on the revenues he bills, at the least.  It may also be illegal - something tickles the back of my brain about "shadow corporation" or hiding behind a corporate veil or something - probably wrong, but if I were your father I would not want to do this.

If you are going to work for yourself, then you need to form a real business and do your own billing.

If you and your wife are making $160K/year together, why are you crapping $2,500/month or so down a rathole instead of buying your own home?
Karl Perry Send private email
Monday, April 10, 2006
clearly you're not from southern cal are ya? :)
jonathan Send private email
Monday, April 10, 2006
Just out of curiosity: with 160k gross income, how much do you actually take home, deducting healthcare, pensions funds etc?
Monday, April 10, 2006
> If you and your wife are making $160K/year together, why are you crapping $2,500/month or so down a rathole instead of buying your own home?

Because the So Cal housing market is set to implode in the next few years.  I look forward to a lot of distressed sales as rates go up and the interest-only crowd tries to refi with negative equity:)

Thanks for the feedback, any other perspectives?
anon for this
Monday, April 10, 2006
DennisTheMenace - prolly about 95-100k net.  My wife has a lowish salary but primo benefits.  I am W2, gross about 105k and get no benefits.
anon for this
Monday, April 10, 2006
Thanks. I'm asking because I've been offered a job in SF (I'm in Germany). Here my company pays about 100k, but after taxes, social security, pensions etc there is about 40k left...
Monday, April 10, 2006
>> If I'm getting 60/hr as a W2, what's a comparable rate as a 1099 or corporation?

Firstly, 1099 and corp-to-corp are treated the same way. If you incorporate an S-Corp or LLC with only one shareholder/partner, then the IRS treats you as if you are self-employed (1099). The reporting overhead of a C-Corp would *clearly* not be worth it in this circumstance.

So the decision is between 1099 and W2. As a 1099 you are responsible for the employer's share (7.65%) of Social Security and Medicare. So you need at least $64.59 /hr as a 1099 to make it equivalent to $60 / hr as a W2.

However, you will also have to do more paperwork as a 1099. It might be an additional 10 hrs per month to keep track of all the data. So you now would need to pad your salary to offset that loss of leisure time.

My recommendation, based completely off of gut feeling with little or no science behind it, would be to ask for $70/hr as a 1099 or $60/hr as a W2. The firms' choice will depend on how efficient their HR department is.

Hope this helps, and good luck!
PWills Send private email
Monday, April 10, 2006
In case my first paragraph wasn't clear...
You should not form an LLC, an S-Corp, or a C-Corp for this project. The LLC and S-Corp will be taxed the same way as the 1099. The C-Corp will be taxed differently, and you may be able to pay less taxes, but it will cost you thousands in administrative overhead to avoid hundreds in taxes.
PWills Send private email
Monday, April 10, 2006
DennisTheMenace, assuming you are not married and are working as an employee, I think 40% would be a good estimate of your tax rate for federal, state, and local combined.

Don't forget about health insurance, which many US employers will make you pay for.  This can vary a lot, but could easily cost you 3-4k per year.
Monday, April 10, 2006
The answer is... it depends. But here are some gotcha's to watch out for.

* If you incorporate, make sure you file form 2553 and elect to  be an S-corp. Otherwise you are looking at a flat 35% federal tax rate on your corporate income as a Personal Services Corp. But remember any S-Corp income will flow to your personal return & you need to make sure you have enough fed & state tax withholdings to cover that.
* Also if you incorporate or opt to organizae as an LLC, the state of CA will nab you for $800 per year for the privilege of doing business in California. This applies regardless of income. You have to pay it every year in advance.
* If you incorporate you will have to pay yourself some kind of a salary. That means filing the requesite payroll forms to both the IRS & EDD (California Employement Development Dept). You will also have to pay those payroll taxes withholdings on a (usually) monthly basis to both the IRS & EDD.
* If you go 1099 make sure you make your quarterly tax deposits (Form 1040-ES & CA 540-ES). In your calculations be sure to include both the income taxes you expect to pay plus Social Security & Medicare (15.3% upto $90K, 2.9% above). Also, you will need to file Schedules C & SE to report this income on your 2006 return.
* Remember to keep track of any expenses associated with the generation of this income. Books, publications, subscriptions, travel (excluding commute) & anything else you can come up with. You can deduct these directly against your income unless you opt to be a FTE. If you do, you can deduct these on form 2106, but it is limited to 2.5% of you AGI, so unless you spend a ton on books it's unlikely you will meet the floor.
* Piggybacking on to your dad's corporation will likely be a nightmare for him & probably not worth doing. I agree with the earlier posting on that. He may also invaldidate any pension plan he has through his company unless he already has other employees.

This is a much more complex topic than most people think. But this is how accountants & bookkeepers can make a living! :)
Linda Coleman Send private email
Monday, April 10, 2006
IMO become a single person LLC and do a corp to corp.

I am in NJ and do a similar thing, bill hourly and according to the test posted above, I am an independent...

The good thing is that you can put away upto $42K in your solo 401K and this is pre tax... add to this your expenses if any and your effective income is pretty low and hence the low taxes...

Buy your own domain name and it is an advertising cost, add the technical books you but and the regular home office and you have some serious deductions...

Anyway, go talk with a real accounttant and do waht s/he says...
Single Owner LLC Send private email
Monday, April 10, 2006
Oh yeah, get yourself a real accountant to do your taxes; push the envelope, but do not lie... and do not involve your father's company... Hire your wife and your kids and put away profit sharing pre tax money in their account and you will pay even lower taxes...
Single Owner LLC Send private email
Monday, April 10, 2006
The home office deduction is only available for space that is regularly & !exclusively! used for business. That means if you call your mom from your home office technically you have just invalidated the deduction. It also affects the tax basis of your home when you sell it.

Second I think most people outside California are unaware of the $800 franchise tax for LLCs. If you only plan to work there 6-12 months, you  will need to close down the LLC to avoid the annual accrual of the tax. Too many people let this slide end up owing thousands of dollars in back taxes. It can easily take 9 months just to get the tax clearance from the FTB to close down the LLC so you can pretty much count on at least 2 years of that tax.

You might consider signing up as a w-2 employee and max out the 401k contribution. Then when you leave roll it over into an IRA. That money can then be used as a downpayment on your first home (up to $10k). You will have to pay income taxes when you withdraw it, but no 10% penalty. If your goal it to buy a house, that might be a good way to save for it.

Also, to answer the W-2 vs 1099 rate question, add at least 8%. That will cover the difference between the your self employment tax & the FICA/MC withholding on your W-2.
I'd say that is the bare minimum and wont account for the hours you'll either spend to handle the administrivia or pay someone else to do for you.

There's more to this equation than just how do I minimize your taxes.
Linda Coleman Send private email
Monday, April 10, 2006
thank you everyone for the great information!
Monday, April 10, 2006
+10 for Single Owner LLC.

Also, LLC allows you to offset liability in ways a 1099 only can not.  You can be very creative with write-offs as Single Owner LLC states.

My dry cleaning is a write off for my business suits if you classify your suite as a "uniform."  All sorts of legal tricks that add up.
Tuesday, April 11, 2006
I'm of the opinion that if you're "functioning pretty much as an employee", you ought to be paid on a W2 basis.  That's how the IRS will view it, anyway.  I think Karl Perry had it right - you are an employee of the consulting firm (the vendor) that is billing the client for your work.
Jesse Smith Send private email
Tuesday, April 11, 2006
Form S-Corp rather than LLC. It is cheaper and simplier with the same benefits. Going corp is better than W2 or 1099 because you can write off more things as business expenses. You can set up your own 401k plan.
Do not mess with your father's corp open your own. Use accountant, it is worth the money.
I do not know about CA specifics, but I base my advice on software consultant experience in NJ, NYC area. Talk to accountant experienced in this field before making any moves.
Eugene Send private email
Wednesday, April 12, 2006

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