The Joel on Software Discussion Group

Which to do?

Here is my take.

CORP CONS
* learning curve to deal w/ paperwork/maintain.  (or just pay someone)
* will complicate your tax return  (in case you do it yourself)
* must pay your own FICA  ($7k?)

PROS
* S-corp setup cost is minimal
* ...can utilize expenses to reduce taxes

----------------

W2

* no paperwork
* but cant take tax breaks.  (But if you dont spend a lot, aint gonna matter)
* they pay 1/2 FICA

comments ?

If you are planning on running a consulting business and/or being an independent consultant as an ongoing thing, then the S-corporation route is feasible. If, on the other hand, this is probably the first and only time this issue will come up for you, then for heaven's sake, just go W-2 and skip all the hassle and aggravation. $5/hr not only covers the self employment portion of your earnings neatly, but is a BARGAIN compared to the value of your time.

Why I say this: the differential you're describing is minimal, compared to the time investment that you will make personally learning everything that you must do to comply with fed, state and local tax and labor laws. As well as the ongoing burden of tax filings, doing separate 1120 returns for the corporation, and so on.

I did just what you're contemplating - incorporated - but it's an aggravation to keep going.

Only incorporate if you're dedicated to the independent contracting route, or you plan something else independent such as your own ISV.

If you are in the US, I believe you overstate the complexity of C2C.  Unless they are requiring you to fully incorporate, it is a little extra paperwork and keeping track of expenses.

That said, I have to agree with BB.  I cannot understand why anyone would pay such a minor difference between the two. They are going to lose more than $5/hour on taxes, expenses, unemployment. workers comp, etc.

I just thought of why.  Make sure they will cover expenses in both cases.  As a W2 it is very tricky to claim expenses on your taxes.  You could get soaked if you need to pick up airfare, hotels, etc.

It costs me about 1200 dollars a year to pay an accountant to prep everything for me. I just give him my bank statements every quarter.

I billed 240K last year and paid 30K in income tax. On a w2, I would have paid closer to 80K.

So the s-corp costs me 1.2k a year and I save 50k. But then again, your mileage may vary.

There's an enormous paperwork and hassle difference between 1099 work (sole proprietor, no corporation, claiming your consulting income on your tax return on sched. C) and corp to corp work (your corp gets paid and you payroll yourself from that.)

The point where the two diverge markedly is treating yourself as an employee separately from the business. You have to track and pay withholdings for federal, state, and local income tax, and you have to deal with state workmen's comp contributions and unemployment taxes. Effectively you have twice the paperwork and tax filing burden of 1099 work.

I've done both and 1099 is FAR simpler accounting-wise.

If your consulting income is based upon maintaining your own business identity, C2C is the way to go. Most people don't bill $240K/yr and most people will jump alternately between contracting and employee/W2 work. Yeah, if you're able to bill consistently high, incorporation is a no brainer.

First off: IANAAccountant.  Verify anything I say with one ;-)

You may not need to incorporate:  You might be able to use your SSN instead of a TIN on the W-9.  Then you just need to make sure you pay your quarterly income tax withholding or the IRS will get mad next April.

If you estimate what your total tax bill will be for the year, and make sure you've withheld n/12 of that at month n when the quarterly filings come due.  (One of them is off-kilter so they're not exactly ever 3 months.)

But, as others have said, it's an extra headache.  And $5 an hour extra doesn't even cover the 7.5% of employment tax you'll have to pay... once you bill more than 90K this way it might work out in your favor.  But usually places give you a bigger increase for going corp-to-corp.

As a W-2 employee would you get benefits?

Oh one more thing:  When you're a vendor (as you would be if it's corp-to-corp), they often pay you on net-30 or somesuch which means a loooong time before you get paid.

And if the company ever has troubles paying its bills, vendors are way behind employees in terms of who gets paid first.

Also consider cow-orkers and management opinions.  At some (most?) places "contractors" are thought of as less important than "employees".

Collection risk is a big issue.

Unless you can shift a large amount of expenses into corporate tax deductions, I think $5/hour is not enough to justify going corp to corp.

Remember that whoever is paying you does not have to pay the FICA, and Medicare taxes, but also does not have to pay unemployment and workers' comp. So they are getting a real bargain.

Besides being able to stall you in favor of the W2 people if they ever get in a cash flow crunch.

On the whole I don't think it's a good enough deal.

Some people will take Corp-To-Corp to preserve their corporate status, even if the money itself doesn't justify it, but since you are not corp already, it doesn't sound like a good deal.

Rule of thumb:

$70 W2 = $140 1099

I believe anyone who has actually worked 1099 will tell you the same.

If you're being offered $75/hr on 1099, they're taking advantage of you.

Philo

Be very careful on the invoices if you go corp-to-corp. Some companies are net 30, others will string you along for 60 days, or even six months!

Be sure your contract specifies an interval of non-payment after which you are free of obligation.

Finally, I am not kidding on the six months. It happened to me once when I was very naive. Talk about payment schedules before you start.

If you can't work this out, it's a sign that there may be trouble down the line.

Gurus,

Can somebody list out the pros/cons of each of the following:

1. C2C
2. W2
3. 1099 (Is this the same as W2?)

I have just started doing 1099 (as contract job) and I learnt that I have to pay my share of FICA taxes. Wondering how can I improve for the next project?

Thanks!

Sam,

"1099" is just a shortcut for "independent contractor."  You pay all your own taxes, the company you are doing work for can't tell you where or when to work, you control your own destiny.  It's risky. 

"W-2" is short cut for "employee."  The company you work for pays half your FICA taxes and withholds US Federal Income Tax payments.  It's less risky but you make less money.

"C2" is an independent contractor - a company - doing business with another company.

==> 240K last year and paid 30K in income tax.

That's an audit (and associated fines, late fees, and interest) waiting to happen -- hope you've got something put back for when they decide to come after you. Better stock up on some of them fancy prepaid legal services while you've got the chance <grin>. I've made half that, and paid more than 30K, and I thought we were a bit agressive/borderline on a few items. I'd be sh*ting my pants on your numbers, not flaunting it proudly in public.

As far as $70 -vs- $75, some folks will tell you it needs to be double: $70 -vs- $140, but I see that as a bit extreme. If it were in the $100(ish) range,  I'd consider going corp, but for $75, it's simply not worth the hassle. W2 all the way, baby.