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 www.buymyhouse7.com/
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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
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 comp and your employer is responsible for any liability.
- Benefits: Your employer can offer benefits such as disability, health care, vacation and retirement accounts.
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 emergencyhomesolutionsoc.com. 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 find a coding languages school. 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.
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.
Resources:
If you have more questions and could like more information, we’ve collected these resources for you:
About Working as an Independent Contractor:
http://jobsearchtech.about.com/od/jobs/l/aa083099.htm
National Association of the Self-Employed:
http://selfemployed.nase.org/
Internal Revenue Service:
IC or Employee: http://www.irs.gov/govt/fslg/article/0,,id=110344,00.html
Starting a Business:
http://www.irs.gov/businesses/small/article/0,,id=99336,00.html
Small Business and Self-Employed One-Stop Resource:
http://www.irs.gov/businesses/small/index.html
Small Business Administration:
http://www.sba.gov/
Startup Basics:
http://www.sba.gov/starting_business/startup/guide.html
What are you experiences with W2, Corp-to-Corp, and 1099? Is there one that you prefer? Let us know below in the comments section or join the conversation on Facebook, Twitter, or LinkedIn!
Thanks to traceymahler for the use of their photos.
