Technical Consulting Taxes: W2, Corp-Corp, 1099

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
requirements.
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.

1. W2 (Hourly | Salaried)
With the W2 tax type, you are a contracted consultant. You are often paid an hourly
rate every two weeks through a direct deposit.
 Taxes: 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.
 Liability: You are given workers compensation and your employer is
responsible for any liability.
 Benefits: Your employer can offer benefits such as disability, health care,
vacation and retirement accounts.

With the W-2 tax method, you're working as a consultant on a contract basis. W-2
contractors basically have an identical setup as a full-time employee except they are
hired on a brief, contract foundation. You might be paid a per-hour fee every two
weeks by way of direct deposits or by another method, depending on the employer's
standard procedures. Your employer pays part of your taxes, such as federal, Social
Security, or Medicare, which is often about 8-9 percent. Moreover, your employer
withholds a part of your paycheck to go toward your income tax payments.

You might be given employee compensation, and the employer is liable for any legal
responsibility. You'll probably be eligible for some advantages, such as important
health care protection.

As a full-time employee, it's important to keep up with the basics of bookkeeping to

avoid tax issues. Employers pay half of the FICA or Medicare and Social Security taxes
for W-2 employees. Independent contractors are responsible for 100 percent of these
required taxes. Additional perks of working as a W-2 employee include paid time off,
health care benefits, 401(k) and retirement options, and other benefits.
2. Corp-Corp
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. 
 Taxes: 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.
 Liability: The contractor’s S-Corp or LLC is responsible for liability and
liability insurance.
 Benefits: 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. 
With corp to corp, you're a normal contractor. You have to be an S-corp or LLC, which
needs some paperwork and a little money to start out. There are some small legal
hoops to jump through. For example, you will be responsible for quarterly tax filings.
You might be paid month-to-month; your S-corp or LLC invoices the company, which
usually offers invoicing inside of 30 days. Sadly, this implies you may go as much as
60 days before receiving your first payment.

The consultant is responsible for paying any required taxes. Tax rates are higher for
consultants, due to tax liability. FICA and Social Security are calculated differently,
which reflects the higher tax rates. Liability and liability insurance fall under the
responsibility of the contractor's LLC or S-corp. Since you own the business, you can
create a benefits package that works for your needs. The corp to corp relationship also
offers the option to customize your retirement plan, as well as several other key
benefits.
3. 1099
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 tax liability.
 Taxes: No taxes are removed from your pay but the consultant is
responsible for all taxes.
 Liability: You will likely need to get insurance to protect yourself from
liability.
 Benefits: 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.

In order to work as a 1099 contractor, the first step is to create a business that is not
incorporated. This business entity will not exist independently of you, so you don't
need separate bank accounts. If a 1099 contractor doesn't pay taxes, the IRS may go
after the employer and hold the company liable for the tax requirement. However, the
contractor is legally obligated to pay his own taxes as none are withheld from his pay.
In order to avoid legal liability, many 1099 contractors choose to take out insurance
policies.