1099 Versus Corp-to-Corp: What's The Difference? - Darbytek

It may be far from April 15th but, whether you routinely employ contractors or are a contractor yourself, it’s wise to consider some tax law before it comes time to fill out end-of-year paperwork. Should you go with a 1099, which is the simplest form of doing business on either side of the contract relationship, or is it better to go with corp-to-corp? As always, the answer isn’t straight forward (otherwise this would be a few sentences instead of a whole post.) But first, a few words on what a 1099 and a corp-to-corp actually are:

1099

Officially, Form 1099 is “a tax form that reports the year-end summary of all non-employee compensation. The 1099-Misc form covers rent, royalties, self-employment and independent contractor income…” (investopedia.com) The advantages? Using 1099 doesn’t require a contractor to set up a corporation, which can involve fees and tedious paperwork. The contractor can also deduct their home office as a business expense. On the employer side, they aren’t responsible for payroll taxes with a 1099 employee.

The downside? The minimum wage law doesn’t apply to 1099 contractors, and they must pay both self-employment and income tax on their own. The contractor also has no liability protection in the case a project goes longer than originally agreed upon. In addition, if 1099 status goes on for more than several weeks, the IRS may disallow independent contractor status and seek back taxes from the employer.

Corp-to-Corp

With a corp-to-corp, instead of the employer paying the contractor directly, the contractor must have an LLC (limited liability company) set up which the employer pays instead. Then, the contractor pays themselves a salary from the LLC. The advantages? Both the employer and employee have some liability protection. The LLC shields the contractor from personal liability, while the employer is indemnified against any back taxes. Their are also no self-employment taxes involved.

The downside? Setting up an LLC involves significant expense, paperwork and maintaining of records for the corporation. The contractor, in effect, would also be paying both employer and employee taxes (as an employee of their own company).

Finally, a brief word on how both 1099’s and corp-to-corps differ from full-time, W-2 employment. The main difference is benefits. Full-time employees are usually afforded healthcare benefits, worker’s compensation, disability and paid vacation, while contract workers are not, though if you do set up a corp-to-corp, you can set up your own paid vacation any way you want and set up your own healthcare benefits.

So, which one is best for you or your company? It depends largely on how long you intend the contract work to endure and what risk you are willing to accept. Tax law is never simple, but this one is an easier read than most, so take a few moments to decide what works for you. To review your personal situation against current tax law, visit https://www.irs.gov/taxtopics/tc750/tc762.

Sources: ttlc.intuit.com, linkedin.com

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