Difference between W-2, 1099 and Corp-To-Corp
The decision on whether to go with W-2, 1099, or Corp-to-Corp is one that many would- be contractors are concerned with, particularly since the decision will have a significant effect on their business’ ability to stay within the bounds of tax laws and what types of tax benefits their owners may be able to avail of. While the Corp-to-Corp option is the best one for a wide variety of applications, your particular needs and circumstances may require you to look into the alternatives. Let's see which one of them is right for you.
Starting Up and Managing
For anyone who is just starting out, the W-2 is by far the easiest and most straightforward option. For one thing, this requires practically no bookkeeping on your part, although you will have to submit time sheets.
The 1099 is just as easy to stare with, and it offers the advantage of being easy to discontinue upon termination of the contract.
As for Corp-to-Corp, setting it up and keeping track of it can be quite be quite difficult, since there is a fair amount of bookkeeping and tax reporting required. The Corp-To-Corp is also a lot harder to organize and dissolve later on.
Benefits
W-2 offers relatively few benefits compared to the other options. The 1099 for instance allows you to draw Home Office Deduction and it even allows you to channel more funds into your small business retirement plan.
Corp-to-Corp offers the benefit of requiring no self-employment tax. In fact, you may even be able to use this to avoid being taxed for a large portion of your income.
In Practice
The W-2 is the best option for those who don’t want to bother with too many forms and for whom the extra savings isn't worth the hassle.
The 1099 for its part offers a number of benefits over the other plans, although it does leave you open to closer scrutiny by the IRS.
As for Corp-to-Corp, this plan requires you to be absolutely meticulous with regard to your balances and credit card statements. On the plus side, this will allow you to get your tax returns in earlier.
Summary
W-2
- The easiest option by far
- No requirements for documents aside from time sheets
- In the event of the unavailability of a 401k plan, users will have limited options in income deferment
- Only a limited number of business costs and medical insurance premiums can be deducted
- Can make it difficult to get health insurance
- Less benefits compared to employees
1099
- Relatively easy to start
- Can be discontinued easily upon termination of the contract
- Offers unlimited liability
- Profits are subject to income tax as well as self-employment tax
- More administration and bookkeeping required
- Tax payments required every quarter
Corp-to-Corp
- Quite a complicated option, requiring plenty of bookkeeping and tax reporting
- Can be quite difficult to set up and dissolve
- Minimum tax required regardless of how profitable your business is
- The salary that you get is subject to taxes
