HR Coordinator at Relevante.Inc
It may not be tax season but, when you’re a technical consultant, you need to be
constantly aware of your tax relationship with your client company. Doing so allows
you to optimize on potential benefits as well as ensures that you know your tax
On the surface, the three consulting tax relationship types (W2, Corp-Corp and
1099) look the same; they are the terms of service for the length of the contract.
However, there are key differences in how these types of tax relationships pertain to
the consultant. Today’s blog post will demystify the three tax types, letting you know
who pays the taxes, where the liability is, and what the benefits are with each one.
With the W2 tax type, you are a contracted consultant. You are often paid an hourly rate
every two weeks through a direct deposit.
Your employer pays a portion of your taxes (Federal, Social Security, Medicare, State),
which usually works out to be 8-9%. Additionally, your employer withholds a portion
of your paycheck for you to help pay your taxes.
You are given workers comp and your employer is responsible for any liability.
Your employer can offer benefits such as disability, health care, vacation and
With Corp-Corp, you are a standard contractor. You must be an S-Corp or an LLC,
which requires some paperwork and a couple hundred dollars to start. There are
minor legal hoops to jump through, such as filling your taxes quarterly.
You are paid monthly; your S-Corp or LLC invoices the agency, which generally
provides payment within 30 days. Unfortunately, this means you could go up to
60 days of work before receiving your first paycheck.
The consultant is responsible for all taxes. Due to tax liability, however, you
should expect a higher rate. This reflects the way in which the employer’s side of
social security and FICA are calculated.
The contractor’s S-Corp or LLC is responsible for liability and liability
As a business owner, you will have the ability to fashion your benefits package
however you would like. In some cases, young workers may find great deals on
individual health plans. In other cases, the ability to control the retirement plan
for your company will help to customize a plan that fits your financial goals.
As an example, in 2012, the SEP-IRA generally allows you to save $50,000 as a tax
deduction and the savings to grow tax deferred.
It is often argued that a corporation will also shield your personal assets from
lawsuits against the company. In practice, this varies widely from state-to-state.
Because of certain IRS regulations, few client companies will allow you to be a 1099 for
more than a few weeks. Historically, when 1099 consultants have failed to pay taxes, the
IRS has, at times, come after their employers and insisted that the employer owes the
No taxes are removed from your pay but the consultant is responsible for all taxes.
You will likely need to get insurance to protect yourself from liability.
Since you are running a business with your 1099, you get many advantages of the corp-
to-corp relationship, including the ability to customize your retirement plan.
While the three types of tax relationships can be overwhelming, closely examine
each one. Determine what types of tax payments, liability and benefits are most
important to you. When you do so, you’ll easily figure out which tax relationship is
best for you.
If you have more questions and could like more information, we’ve collected
these resources for you:
Internal Revenue Service:
IC or Employee: http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html
Starting a Business:
Small Business and Self-Employed One-Stop Resource:
Small Business Administration: