With the rise of the internet and tech companies that have enabled the gig economy, more workers are eschewing full-time employment for the flexibility of less permanent working arrangements — known as the contingent workforce.
This blog post will look at the three different types of contingent workers whom companies can hire and will examine the pros and cons of each. Most employees in the U. They get the security of consistent employment even if it is temporary and access to the equipment and training necessary to perform the job, but the company gets to dictate almost all of the remaining terms of the arrangement, including when, where, and how the work is accomplished.
As a result, these employees are given a W2 tax form at the end of each year. The employer has to pay employer taxes, and withholds the employee taxes and remits to the government on behalf of the worker. An independent contractor operates as an unincorporated, individually owned business, and in many ways, these workers can be viewed as the opposite of a W2 employee. There are many different types of independent contractors, but a few examples include Uber drivers, freelance writers, graphic designers, photographers, consultants, and many other self-employed business owners and skilled workers that specialize in a trade.
Companies can also hire corp-to-corp workers by engaging the services of an incorporated contractor. In addition, the contracted corp-to-corp worker must own an LLC or a corporation. If Nike hires a shoe design consultant who owns Savvy Sneakers, LLC, for example, Nike is engaging the worker under a corp-to-corp arrangement.
When a company engages a W2 employee, the company has a host of responsibilities they must attend to beyond writing a paycheck each month. Those responsibilities include providing a safe work environment, offering the necessary training, paying employer taxes, withholding employee taxes to remit to the government, and issuing W2 tax forms at the end of each year.
You may prefer a corp to corp arrangement instead of a , as it protects you from the risks regarding the employer-employee relationship. Even though you are paid via , the IRS might still consider you an employee and disallow your independent contractor status. The major difference between C2C and is that with C2C, you don't have to pay self-employment taxes on your income. However, you must pay yourself a set salary, as well as pay all required employee and employer taxes.
At their most basic level, the three consulting tax relationship types W-2, Corp-Corp, and seem identical. Nonetheless, there are variations in how some of these tax relationships affect the individual.
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 percent. Moreover, your employer withholds a part of your paycheck to go toward your income tax payments. However, the biggest advantage of incorporating a business is the liability protection shareholders can benefit from. There are some important benefits to work under a C2C relationship with a company instead of being hired as an employee. The worker choosing a C2C model instead of being hired as an employee can benefit from increased cash flow.
The primary reason why the cash flow is higher is due to the fact that the employer, the client, does not have an obligation to withhold any taxes on the services fees paid to the service provider. As a result, the freelancer or independent contractor has the interest to take profitable projects and stay away from expensive and costly ones. Depending on the type of work, a contractor may end up with tax advantages that would not be otherwise available as an employee.
When you run a limited liability business, you are shielded from possible debt, lawsuit or claims. Hiring a company as a service provider to handle a specific project or task may be cheaper and easier to setup. By hiring incorporated workers, client companies benefit from having less employee headcount on the payroll. They will also hire individuals experienced to handle the project or assignment they are looking to accomplish. Also, when the job is done or the project is finished, the client does not have an obligation to continue paying the service provider.
They can terminate the commercial relationship with a simple notice whereas terminating an employee must follow requirements of the domestic labour laws. An important risk for employers is that if they misclassify an employee, they can be exposed to important fines, penalties and liability towards the misclassified worker.
In the event of a dispute or an audit, if the authorities discover the employer has misclassified an employee as an independent contractor or intended to avoid labour law obligations, the employer can face important sanctions. Often, the independent worker will argue that he or she was truly an employee and not an independent consultant or contractor. They will argue that although they signed a corp to corp contract, they were really subordinated to the demands of their de facto employer who controlled all aspects of their work just like an employee.
The independent contractor will attempt to establish they had and implicit employee status. If the courts recognize that the independent contractor was essentially an implicit employee, then the labour laws would apply to that relationship as if the person was hired as an employee. The de facto employer may be exposed to labour law violations requiring it to compensate the de facto employee.
For companies looking to hire freelancers and independent consultants, to validate that you are truly in a corp to corp relationship and avoid misclassifying an employee, here are some questions you should answer:.
What does Corp-to-Corp mean? Bottom line, corp to corp means that you have to own either an LLC, corporation, or S corporation. So, why exactly do employers prefer corp to corp arrangements? Reduce employment taxes 2. It reduces the likelihood that the employer will be audited for misclassifying employees.
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