As a small business owner, you may decide to hire a contractor to carry out some work instead of getting it done by your employees. When you do this, it’s important to know how the contractor’s company is structured. Many business owners prefer a Corp to Corp (C2C) arrangement.
What exactly is Corp to Corp? And why do small business owners favor this arrangement?
In this post, we’ll examine what Corp to Corp means, its advantages for small business owners, and how it compares with the other methods of paying people who work for you.
What is Corp to Corp?
A reference to Corp to Corp, or C2C, implies that one corporation makes payments to another corporation. In other words, the corporation owned by you is paying the corporation owned by the contractor.
In other words, a Corp to Corp arrangement is one where a small business owner pays a contractor, but the entity receiving the payment is not treated as an employee. Consequently, the employer does not have to go through the process of hiring employees for the small business or calculating employees’ salaries.
Don’t confuse it with Consumer to Consumer. Consumer to Consumer is not about payments, but a way to make busines: it’s when two consumers exchange goods or services, for example, when you sell used goods. It’s easy to confuse it with Corp to Corp, as it can be abbreviated as C2C too.
What are the benefits of Corp to Corp?
There are several reasons small business owners are inclined to opt for a Corp to Corp relationship with a contractor:
You can save on employment taxes
The company that has employed the contractor doesn’t have to worry about paying Social Security taxes, Medicare taxes, Federal unemployment taxes, and State unemployment taxes.
The contractor will raise an invoice on you for the services that have been provided, and you would have to make payment.
You don’t run the risk of misclassifying an employee as an independent contractor
Independent contractors are considered to be self-employed individuals according to the rules of the IRS. However, the government may consider the independent contractor you have engaged to be an employee.
How does the IRS decide whether an individual is an employee or an independent contractor?
They don’t blindly follow your categorization. Instead, the IRS determines if the services that are performed “can be controlled by the employer.” If the employer exercises this control, then the IRS considers the independent contractor to be an employee.
Bear in mind that an employee is subject to FICA and income tax withholding. It could be cumbersome as well as an expensive exercise to have to reclassify independent contractors as employees.
But if the relationship with the contractor is on a Corp to Corp basis, you won’t face this issue.
Your legal responsibilities are limited
In many situations, business owners are responsible for the conduct of their employees. A worker’s job-related accident could result in a financial loss to the employer. However, if the relationship with the contractor is on a Corp to Corp basis, the legal liability is far lower.
We have listed the benefits of Corp to Corp for employers. However, there is a significant advantage for the contractor as well. A business structured as an LLC can protect the business owner from personal liability. The contractor’s vehicle, house, and savings accounts will not be at risk in the event of a bankruptcy or if a creditor files a lawsuit.
A limited liability company (LLC) protects a contractor’s personal assets
Source: U.S. Small Business Administration
Does Corp to Corp have any disadvantages?
Corp to Corp is beneficial for both the small business owner as well as the contractor. However, this system does suffer from some downsides.
The contractor would have to complete some paperwork to register as an LLC. This could mean spending several hundred dollars in filing fees and professional costs. Subsequently, the contractor would have to comply with the legal requirements of running an LLC.
There are financial implications for the small business that has hired the Corp to Corp contractor, as well. The amount charged for a specific task by an individual contractor is usually less than the sum that will have to be paid to a Corp to Corp contractor.
Corp to Corp rate vs. W2 vs. 1099
In this section of the post, we’ll examine the terms “W2 employee,” and “1099 contractor.” We’ll also see how these categories of workers compare with Corp to Corp contractors.
W2 employee: The term W2 comes from the tax form used for this type of employee. Companies are required to file Form W2 for their workers. These individuals are regular salaried employees who work on a full-time or part-time basis. The employer is required to pay payroll taxes on their behalf. If a W2 employee does not perform the job well, the employer can terminate his or her services.
1099 contractor: The numerals 1099 also refer to a tax form. Form 1099 is to be filed for independent contractors. These workers are usually hired for a specific period or a particular task. A 1099 contractor could, in turn, hire workers to help complete the assigned task.
Unlike W2 employees, 1099 contractors aren’t eligible for health insurance, paid holidays, and other benefits.
Here’s a table that summarizes the differences between W2 employees, 1099 contractors, and C2C contractors.
W2 vs 1099 vs C2C: at a glance
|W2 employee||1009 contractor||Corp to Corp contractor|
|Type of employment||A W2 employee is an employee in the traditional sense||Self-employed independent contractor||Contractor|
|Withholding taxes||Taxes are withheld by the employer||Taxes are not withheld||You may have to pay yourself a salary. This will be subject to withholding tax|
|Extent of control exercised by the employer||The employer exercises a high degree of control over the work that the employee carries out||Limited control||Limited control|
|Materials and tools used to carry out the work||Provided by the employer||The contractor arranges the materials and tools that are required||The contractor arranges the materials and tools that are required|
|How is the payment made?||Payment is made in the form of a salary||The contractor raises an invoice||The contractor raises an invoice|
|Expense involved||W2 employees are usually paid less than contractors for a similar task. However, you usually have a long-term commitment to this category of worker||Could be more expensive than a W2 employee||Corp to Corp contractors usually charge a premium for their services|
Is C2C what your business needs?
As a small business owner, you can gain several benefits from hiring Corp to Corp contractors.
As there’s no long-term commitment to employ them, you gain the flexibility of engaging them when needed. Your record-keeping and paperwork are also simplified, as you would not need to maintain employee-related data or withhold taxes.
On the flip side, Corp to Corp contractors can be more expensive than W2 employees or 1099 contractors.
So, what should you do? Go with C2C or hire employees for your company? As a general rule, a Corp to Corp contractor could be a better option for one-time tasks requiring specialized skills. W2 employees are preferable for regular long-term requirements.
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