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Types of contracts (W2, corp to corp, et
I have only worked as a full-time "permanent" employee, never as a contractor. I am considering taking a contracting position in a different locale. What are the types of contracts, and how do they differ? I have seen W2, Corp-to-corp, etc. but I don' t know what the differences are. I have heard there may be tax consequences for each type. Can anyone enlighten me?
- W-2 you become an employee of the contract agency who then pays you based upon agreed to rates. They will pay your taxes. Caution on this one as they will pay your taxes and sometimes even "their" share of your taxes out of your rate. With rare exception do contract agencies provide benefits though there are some that do.
- Pro: You will not have to worry about FED or STATE taxes as the contracting agency will pay them.
- Pro: You will usually receive a regular paycheck bi-weekly from the contracting agency.
- Pro: You may have access to some benefits such as group health insurance at a discounted rate
- Con: Your actual billing rate will likely be reduced to cover said taxes including the contracting agency share
- Corp-to-Corp would indicate that you have a legal corporate set up already. This means that you work for your corporation and have the ability to sign contracts under your corporate logo, invoice under that logo, collect monies under that logo, etc. This is the "best" route to take if you are going independent as the financial advantages are great for you as a individual. If you are going this route you will need to get incorporated to take advantage of these benefits.
- Pro: You are in control of your money! The new corporation invoices for you (well obviously you do this) and sets terms for payment.
- Pro: You pay yourself a salary. You can lower your tax bracket by paying yourself a lower salary. Get yourself a good attorney. Transfer all assets to your corporation including autos, home, everything. Let the corporation pay for these so you will not need your current salary to pay for them.
- Pro: Huge Tax Benefits!!! You can even lose money the first year and not get audited.
- Pro: No intermediary so your rate is your rate. You can negotiate the right rate for the job and don' t have to consider the uplift.
- Con: You have to be diligent in maintaining your corporate books (hire an account and implement QuickBooks is my recommendation)
- Con: You have to sometimes become a collection agency when your clients don' t pay on-time. With your first contract for the first 60 days be prepared for cash flow issues. Most corporate clients pay on 45 day terms no matter what the agreement is.
- Con: Taxes will be more confusing (again make sure you have a good accountant and a good attorney for your corporation)
- 1099 is where you are simply a individual contractor, usually working through a staff augmentation firm who will uplift your rate anywhere from 8% to 20% for administration fees. Essentially the contracting firm will invoice for your hours and T&E then pay you, usually when they are paid. They don' t deduct taxes or pay taxes.
- Pro: There aren' t a lot of pros with this option. You are independent and not independent at the same time. Unless the company is hiring directly without a third party contract holder meaning you will contract directly as a 1099. If this is the case you will prepare your own invoices submitted directly to the company, I would recommend you do this on a weekly basis. Have an attorney look at the contract before you sign it!
- Con: You are responsible for invoicing either directly to the company or to the contract agency.
- Con: You are responsible for up front costs and will wait up to 60 days for reimbursement (cash flow).
- Con: You may have liability issues in contracts that you will be personally responsible with no corporate shield. This means you could lose all personal assets in the case of a lawsuit.
Hope this helps.
Please consider getting some tax and legal advice if you are considering the corp-to-corp scenario mentioned above. Some of the statements are on the borderline, if not over the line, of being fraudulent and any responsible professional advisor that you talk to will tell you so. A corp cannot pay your personal expenses without it showing up as wages to you, no matter what you hear from people who have done it. And yes, you can have a loss if you actually have a loss. This will take some work to investigate the most beneficial setup for you and get everything in place correctly and do the record keeping required.
Many thanks for the summary. I was assuming that corp-to-corp might be applicable if I were incorporated. It seems as though W2 is probably best for me at this point.
First if you read what I wrote I suggest first hiring an attorney and an account. Second I did not suggest that the corporation pay personal expenses. I suggested transferring personal assets to the corporation, legally. This step provides legal protection for you and your assets in the case of a lawsuit. Any good attorney will suggest doing this. This is a legal transfer of assets to the corporation at which point the corporation begins paying the bills and gets the benefits of the assets including depreciation. This is legal if done through a proper transfer of assets. Third I suggested that record keeping was a challenge and that it would be important to not only set up a system but also have an accountant. Try reading before making the type of comments you made which I was highly offended by. If you knew me from any of my other postings on this and other forums you would know that I would never suggest to anyone that they do something either illegal, unethical, or immoral.
I didn't mean to offend and I'm sorry if I did. I was afraid, from what you had written, that someone unexperienced would jump to the end of the story and make the assumptions that I have seen people make, where having a corp or other entity would solve all their problems. Yes, this is a situation that people can make work well if they take the time and put in the effort to set things up correctly. But it's not a quick fix and won't solve everything. And there are accountants and attorneys out there who will steer people down paths that, instead of solving problems, can create more, all the while making the accountants' and attorneys' boat payment for them. So some self education is a necessity. |