Key Takeaways

W2 contractors are paid by an employer and provide benfefits.
1099 Contractors receive all the income for their contract without taxes taken out and are responsible for managing how money is used.
C2C Contractors save the most in term of taxes as the rate goes up but are required to pay themselves a salary.

As a freelancer or an independent contractor, understanding 1099 vs C2C classifications is important for negotiating better compensation and benefits.

According to Linkedin, we can see there are over hundreds of 1099/Corp-to-Corp (C2C) opportunities.

The real question is what type of opportunity best serves your needs.

In this post, we’ll explore the differences between these classifications and what they mean for independent contractors.

Why do companies hire contractors?

Before we go into what the types of classifications are, let’s talk about why companies hire contractors to begin with. When a company decides to start a new project, they often need employees to accomplish that work.

However, the cost of finding and interviewing employees or consultants is high. This is why companies will outsource the search to companies often referred to as vendors/ staff agencies to supply the talent.

What is Corp-to-Corp(C2C)?

Corp-to-Corp, or C2C, is a type of employment classification in which an independent contractor or freelancer sets up a separate legal entity, such as a Limited Liability Company (LLC), to work with a client. In this scenario, the client hires the contractor’s LLC rather than the contractor themselves. The LLC is then responsible for paying its taxes and providing its benefits, such as healthcare and retirement plans.

How’s the pay for C2C?

C2C pays the highest rate of all 3 options because the client is not responsible for paying any taxes and passes all of that to the contractor. C2C comes with greater responsibilities since the contractor has to manage their taxes and benefits, but the greatest reward is if you’re willing to take the small leap.

Corp-to-Corp contracts are typically offered to more experienced contractors and freelancers who have a solid reputation in their field. They provide greater opportunities for earning more money since the contractor can set their billing rates and may have multiple clients at once.

How does C2C contracting work? – Data Analyst (Example)

Let’s say you land an opportunity as a data analyst consultant to help a Fortune 500 bank. In this example, your company would be written checks for any work. From there, you would be responsible for determining how much of your income should be used for salary, benefits, and business expenses.

The ability to set your own salary or benefits is very appealing to many entrepreneurs.

W2

Now, W2 is the most common type of employment classification in which the contractor is hired as an employee by a vendor/staffing agency. As an employee, the contractor receives a regular salary and is eligible for benefits such as healthcare, retirement plans, and paid time off.

The vendor is responsible for paying a portion of the contractor’s taxes and withholding the appropriate amount from their paycheck.

Note: Not all vendors provide great benefits. In fact, some will pay you a higher rate with the understanding you will find your own health insurance or may have health insurance through a partner.

How does W2 Contracting work? – Product Owner (Example)

Most consultants I’ve met started as contractors working on w2 for a vendor who has an existing contract.

Imagine there is a company Blaze Consulting which is a recruiting vendor that hires consultants. Blaze Consulting has a contract opportunity with Apple Inc. You as the consultant would work for Blaze Consultant and Apple would be your end client.

What this means is that you get paid by the vendor and not the end client.

W2 contracts are typically offered to contractors who are working on long-term projects with a single client. The client company may require the contractor to work onsite or have regular hours, which can limit the contractor’s flexibility.

I have worked with clients who didn’t care how much you worked as long as you got your work done. W2 is great for those looking for higher pay without the responsibility of setting up an entity.

1099

1099 is a type of employment classification in which the contractor is considered an independent contractor and is responsible for paying their taxes. 1099 typically provides the 2nd highest in terms of pay with less tax paperwork than C2C.

The client company provides the contractor with a 1099-MISC form at the end of the year that reports their earnings, but they do not withhold any taxes from the contractor’s pay. The contractor is not eligible for benefits such as healthcare or retirement plans.

1099 contracts are typically offered to contractors who are working on short-term projects or who provide specialized services that are not needed regularly. Depending on the project size, some consultants prefer 1099 because taxes are simpler than if you have a corporation set up.

Conclusion

In conclusion, understanding the differences between Corp-to-Corp, W2, and 1099 employment classifications is important for independent contractors and freelancers. Each classification has its advantages and disadvantages, and it is up to the contractor to decide which one best fits their needs and goals.

By knowing the differences, contractors can negotiate better compensation and benefits, and make informed decisions about the type of work they pursue.

To get started in C2C Contracting, head over to our post on setting up your business in 2 weeks.