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W-2? 1099? Corp-to-Corp? What's a new software consultant to do?

Pretty much as long has there have been outside consultants, they have been asking this question: W-2? 1099? or Corp-to-Corp?

For the unintiated, any new consultant needs to determine how they will organize their business. And these are the usual options people talk about. You would think it's a pretty straight forward calculation, but it can really become quite complicated.

I made a new posting, Consultants: W-2, 1099 or Corp-to-Corp?, that goes into some detail about the issues you need to consider. Each option has its own advantages and drawbacks. As with most things, it's all about the trade-offs.

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a different issue - being paid as an individual not LLC

linda - this is a huge resource for so many - thank you.

i have a multi-member LLC doing business consulting. every once in a while a client will insist on writing a check to me in my name with my personal SSN and issuing a 1099. they have varied reasons for doing it and i try to reason with them but get nowhere. so far i have turned these projects down.

my question is if i receive a payment in my name and get a 1099 with my SSN is there some formal way i can "transfer" the revenue to my LLC and make sure that the Fed and NJ tax depts don't hound me in years to come?

HOW TO EXCLUDE the FIRST 7.65% EARNED INCOME (1099)?

Hi Linda,

Thank you for your wonderful article. I read it from the line 1 to the last. Appreciated.

I have a question on HOW TO EXCLUDE the FIRST 7.65% EARNED INCOME. Any IRS publication on this? This tax break was mentioned in your article (please see the below for the section of your article).

Thank again for your time.

Best,
Your reader

---
Self-Employment Taxes: The Unexpected Tax

This is where the self-employed really lose out over corporations. Any profit on earned income that accumulates in your business is subject to self-employment taxes. This is true of partnerships and LLCs, too. Only corporations are not subject to this tax on accumulated earnings. They have their own tax on excess accumulations to worry about, but it usually doesn't affect small corporations.

Before we get too far, just what are self-employment taxes? Self-employment (SE) tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.

You may not be aware that your employer matches every dollar that is withheld from your W-2 paycheck for social security and Medicare taxes. Employees pay 6.2% and employers pay 6.2% for a total of 12.4% on the first $94,200 of wages (that's the social security cap for 2006) and 1.65% each for a combined total of 2.9% on the remaining amount for Medicare. As a self-employed individual, you get to pay both halves, but the IRS gives you a bit of break and you can exclude the first 7.65% earned income. Plus you get another "break" because you can deduct half of your SE tax from your taxable income (Form 1040, Line 27).

So many people go into business with no idea this tax is out there then come April they get slammed with the SE tax. Then the IRS will get them for interest and penalties because they didn't make any payments toward it throughout the year. It can be quite a shock!

Self-Employment Tax Calculation

Hi

The exclusion is part of the SE tax calculation. Take a look at Schedule SE. Line 4 has you multiply your self-employment income by 92.35% The 15.3% SE tax is applied to this amount.

For example, if you had $10K of SE income, your SE tax would be $1413. ($10K x 92.35% x 15.3%).

If you had paid the tax on the full amount, the tax would be $1530 ($10K x 15.3%).

Hope this clears that up.
L:)

Linda, This is a fantastic

Linda,

This is a fantastic blog I have seen for consulting and corporations related Qs. Thanks for the effort.
I am on H1b status and working for a company on full-time basis. I am setting up S-corp IT services company and have some quick questions, please provide some insights into these:

1. Is it better to hire someone as recruiter for my firm on part-time basis and pay minimum wages plus commission based on performance (or) give a percentage based on performance, but for later scenario unless my employee achieves goal he/she would not be able to get any pay. So does the later scenario have any legal and tax issues
2. In contracting cases, My company will act as Middle men for client and another consulting company (whose employee will be consultant providing services to my client). When I get payment from client, I would have to deduct all the expenses and pay to the consulting company I am in contract with. How do the taxes go with the income I have now.
3. Can I hire someone in canada/uk or other country who will manage the company and run Do I need to have atleast 1 employee in USA to run the business.

re: LLC or S Corp

Linda,

I'm a contract Web developer living in Connecticut and I am considering taking a position several hours from my home. The position is in another state and would last for six months. I would rent a room during the week returning home on weekends. My choice upon hire is either a W2 or Corp to Corp, they don't offer 1099. I'm considering corp to corp but I have several questions:
1. Which is easier to set up, an LLC or S Corp?
2. I'm working on a 1099 now. Which is the most similar to a 1099?
3. The LLC seems to cost approximately $500 to set up online. Is this generally the amount you would expect to spend?
4. My assumption is that, like a 1099, taxes are not deducted weekly or monthly. Is this correct?

I appreciate your time and answers.

Kind regards,

Rob B

Linda, This is a fantastic

Linda,

This is a fantastic blog I have seen for consulting and corporations related Qs. Thanks for the effort.
I am on H1b status and working for a company on full-time basis. I am setting up S-corp IT services company and have some quick questions, please provide some insights into these:

1. Is it better to hire someone as recruiter for my firm on part-time basis and pay minimum wages plus commission based on performance (or) give a percentage based on performance, but for later scenario unless my employee achieves goal he/she would not be able to get any pay. So does the later scenario have any legal and tax issues
2. In contracting cases, My company will act as Middle men for client and another consulting company (whose employee will be consultant providing services to my client). When I get payment from client, I would have to deduct all the expenses and pay to the consulting company I am in contract with. How do the taxes go with the income I have now.
3. Can I hire someone in canada/uk or other country who will manage the company and run Do I need to have atleast 1 employee in USA to run the business.

So this is what all the

So this is what all the H1B's that we are bringing into this country are doing? Bringing additional H1B's in to take additional jobs? No wonder we have unemployment reaching 20%. This guy needs to be reported to the USCIS - what he is doing is illegal. I also like the way that he doesn't even want to hire someone from the US to manage the company. This sounds like exactly what the bogus H1B program was intended for - it needs to be ended NOW.

Recruiting Firms

Hi,

1. That really depends on the compensation package you negotiate with the recruiter. The commissions are wages, just like the hourly wage, and subject to all employment taxes. There's no tax advantage to paying commission versus wages.

2. I'm not sure I understand the question. If you mean the how will the new income interact with your salary from your FT job... the net income (or loss) from your business will flow to your personal tax return. It will be combined with your salary plus any deductions to arrive at your taxable income. You pay income tax on the net income of the S-Corp at your personal marginal tax rate.

3. No, your employees can be anywhere. But if it's a US S-corp you'll be paying tax on the net income on your federal tax return. If your H1B status changes and you move overseas, the income from the S-Corp will likely be US source income & you will have to pay US taxes on that.

Hope this helps.
L:)

Recruiting Firms

Thanks for the clarification. It was quite helpful.
Regarding (3) point - hiring recruiter/manager outside USA. So since I dont need to hire anyone in USA, I will probably hire someone in Canada/UK. I want to have head office in USA and can I show the expenses incurred in other country (taxes in other country + salary to my employee and deduct from my S-corp income here.

-- Can I hire OPT, CPT from the start date of company. I was told that I cannot sponsor H1B for 2 years after starting company, is it true. If so, can I hire H1B people who are already working in USA(and sponsor through my company)

Thanks

H1B

Hi,

On the first question, yes you deduct expenses incurred & paid in other countries.

Regarding OPT/CPT/H1B hiring & sponsorship, I just don't know. That's not my area of expertise.

L:)

This is where the

This is where the self-employed really lose out over corporations. Any profit on earned income that accumulates in your business is subject to self-employment taxes. This is true of partnerships and LLCs, too. Only corporations are not subject to this tax on accumulated earnings. They have their own tax on excess accumulations to worry about, but it usually doesn't affect small corporations.

Before we get too far, just what are self-employment taxes? Self-employment (SE) tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.

You may not be aware that your employer matches every dollar that is withheld from your W-2 paycheck for social security and Medicare taxes. Employees pay 6.2% and employers pay 6.2% for a total of 12.4% on the first $94,200 of wages (that's the social security cap for 2006) and 1.65% each for a combined total of 2.9% on the remaining amount for Medicare. As a self-employed individual, you get to pay both halves, but the IRS gives you a bit of break and you can exclude the first 7.65% earned income. Plus you get another "break" because you can deduct half of your SE tax from your taxable income (Form 1040, Line 27).

LLC or S-Corp

Hi Rob,

1. An LLC is usually easier to setup. But an LLC can opt to be taxed as an S-Corp by filing form 2553
2. LLC is taxed as a sole proprietor by default, which is the same as 1099.
3. You can usually do it yourself by filing a form with your state's Secretary of State office. You're paying for expedited service for the higher price. Intuit's MyCorporation has a deal with prices starting at $99.
4. yes.

L:)

First of all I want to say

First of all I want to say huge thank you for amazing article regarding W-2, 1099 and Corp-to-Corp. It was hard to understand me these work options before but now everything is clear! I realized that every of this option has it's pros and cons and I will try to choose the best one. Thanks one more time!

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