Q : I am considering consulting and have spoken to a number of recruiters, seen some job postings, which mention W-2, or 1099. What does that mean?
A: Jargon, jargon!! Both of these refer to the IRS forms on which you will report income earned, and the difference between the two is in terms of the relationship between you, the consultant, and the company which hires you. Say Company A wants to hire you as a consultant. If they offer you W-2 employment, that means you will become an employee of Company A, you will list Company A as an employer on your resume, you will be paid a salary, and if the company offers benefits, such as paid time off, healthcare, retirement plans, you may be eligible to participate in them. Company A will also collect tax on your behalf. Note that it is possible to be hired as a W-2 employee and be paid on an hourly basis. Benefits such as healthcare, paid time off, etc., will be pro-rated depending on the hours you work. You may also be hired as a W-2 consultant for a short term project – many companies will not want to do that, as there is often a waiting period for benefits, and there are on-boarding costs for them, but it is certainly possible to be hired as a W-2 consultant for a fixed project lasting, say, 6 months. Lastly, some companies offer limited W-2 employment, usually for a fixed length assignment, which they may call “W-2 project”, where you are an employee, they collect your employment taxes, but you are not eligible for company benefits such as healthcare, time off, etc.
If, however, Company B wants to hire you, and offer you 1099 employment, that is similar to the relationship you might have with a painter. You want them to paint your house and agree a sum for that job. At the end of the job, or periodically during the job, if it’s a big house, the painter will send you invoices, and you, hopefully, will pay them. You don’t collect taxes for the painter, you don’t offer them paid time off, or health insurance. You do, however, need paint, and either you supply it, or the painter will buy it, and charge you for it. Similarly, Company B wants you to carry out an assignment for them, and you agree a sum for that assignment, most often in terms of an hourly rate you’re paid while carrying out that assignment. You may agree to include your travel and accommodation costs in that sum, or to charge for that separately. Alternatively, Company B may have its own travel department, and may book your travel for you. What is important, though, is that Company B will only pay you for the time you work, will not offer you any company benefits, and will not collect taxes for you. They are all your responsibility, so you must factor those into the price you agree. Periodically, most often every two weeks, you will send an invoice to Company B, asking for payment for the work you’ve done, and for any travel and accommodation costs you’ve accrued. This arrangement is most often used when a company has a short term need.
Thanks, that all makes sense – but what does “corp to corp” mean, then?
Well, these are nuances in the type of 1099 form you are filing at the end of the year. You can either file as an individual, using your own Social Security number, or, you can incorporate as a company, and use your company ID on the 1099. The IRS has recently focused its attention on companies which hire 1099 individuals. According to their rules, a company can only hire someone as a 1099 individual employee in very restricted and defined situations. In all other cases, they should be hired as a W-2 employee. Given that extra scrutiny by the IRS, a lot of companies are avoiding hiring 1099 individuals altogether, and are requiring that the consultant is incorporated, and thus the relationship is between corporations, corp to corp.