What is the difference between Corp to Corp vs W2?
What are the pros and cons?
How does it work?
In this article, I will break down the notion of Corp to Corp vs W2 so you know all there is to know about it!
Keep reading as I have gathered exactly the information that you need!
Let me explain what C2C and W2 mean and why it’s important!
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Corp to Corp vs W2 Overview
Knowing the difference between a corp to corp relationship and W2 relationship is important so you can make the best decision about how to structure your relationship with your employer.
What Is C2C
A “Corp to Corp” relationship , also referred to as C2C, is one where you will render your services to a company through a corporation, a limited liability company, or s-corporation.
In other words, you (as the employee) are acting through a “corporation” and dealing with another corporation (therefore “corporation” to “corporation”).
In the context of this commercial transaction, the service provider will provide services for the duration specified in the contract and for the agreed price.
Incorporated contractors working for companies tend to use the “corp 2 corp” term to refer to their commercial relationship.
Incorporated contractors generally have full autonomy in managing their company and how they offer their services.
What Is A W2
A W2 relationship is where a person is hired as a contracted employee to work for an employer (typically through a staffing agency or recruitment firm).
The reason why we refer to this relationship as a “W2” is because employers are required to complete a W2 Form called the Wage and Tax Statement to employees having earned salaries and wages (excluding contracted workers or self-employed individuals).
A W2 employee may be a full-time or part-time employee working for a company where he or she signs an employment agreement directly with the employer.
Unlike a Corp to Corp structure, the W2 employee does not operate through a business entity and gets his or her salary paid directly by the employer.
On the other hand, in a Corp to Corp setup, the “client” pays the “service provider’s” company and not the person.
Differences Between C2C And W2
What are the main differences between a C2C vs W2 working relationships?
A Corp-to-Corp is a contractual relationship between a “service provider” and a “client” where the service provider is a legal entity of some kind.
In essence, the service provider as a company is responsible for:
- Paying its corporate taxes
- Filing tax returns
- Invoicing the client for services
- Collecting its accounts receivable
- Maintain the corporate entity in good standing
- Assume its business costs and expenses
- Maintaining proper liability insurance
- Take on commercial risk
- Be entitled to business profits
Performing services to clients under a company can be highly rewarding and profitable.
It’s important to consult with a labor lawyer or tax attorney to get a better understanding of the legal implications of such a structure.
A W2 relationship is your standard employment relationship.
In a W2 setup, a person is hired as an employee to provide services to a company acting as the employer.
A W2 employee will have the following rights and obligations:
- Is entitled to a salary or wages
- The employer handle’s the employees tax deductions
- Can be entitled to Medicare
- The employer assumes the liability for the employee’s work
- May get employment benefits such as retirement accounts
- Can take vacations
Advantages And Disadvantages
What are the main advantages and disadvantages in choosing between a W2 or Corp To Corp working model?
Corp To Corp Pros And Cons
The main reason why someone may be attracted by a corporation to corporation working arrangement is that you will not have to pay self-employment tax and you can use the small business retirement plans to defer income.
On the other hand, setting up a corporation, LLC, or S-Corporation will cost you time and money to form and to maintain in good standing.
Every state has different rules with regards to how companies are formed, the company’s reporting obligations, and other compliance obligations.
In addition, your company needs to keep a good record of its business operations so that it can provide the necessary justifications in case of an audit of some kind (so lots of bookkeeping and administrative work).
W2 Pros And Cons
The main advantage of acting as a W2 contracted employee is that you have a job where you may be paid on a regular basis (weekly, bi-weekly, or monthly), your employer trains you to do your job, offers you the tools and equipment you need, and handles all the administrative paperwork for you.
In addition to that, W2 employees will also be covered by workers’ compensation, get unemployment benefits, have Medicare and other disability insurance coverages, get to take vacations or sick days, and may have the ability to contribute to a retirement account.
On the flip side, not all employment opportunities may give you all the benefits or health insurance coverages that are important to you.
Tax Rules Applicable To Corp 2 Corp vs W2
It’s important to note that whether you choose to qualify yourself as a C2C service provider or a W2 employee, the tax authorities may not necessarily agree with your qualification.
In fact, there are a set of rules and regulations where the tax authorities factually evaluate your working relationship and determine in what category you may fall (W2, C2C, or 1099).
You should consult the IRS publications relating to Independent Contractors vs Employees to better understand the tax implications between a Corp 2 Corp vs W2.
In essence, the IRS will use the following factors to determine if a taxpayer is an independent contractor or an employee:
- Behavioral control
- Financial control
- Relationship of the parties
The behavior control looks at how extensively a company controls the work performed by another company and determines the means by which the work must get done.
The financial control considers who assumes the business expenses, invests in the tools and equipment needed for the job, offers services to other clients, how many employees are working in the company, and who assumes business profits and losses.
The relationship of the parties is determined by looking at how the parties documented their relationship, if a person receives “employee-type” benefits, the duration of the relationship, and the importance of the work performed.
C2C And W2 Examples
Let’s look at an example of how a C2C and W2 relationships may be structured in real life.
John has a lot of experience in project management and wants to provide his services to many companies.
As a result, instead of applying to become a regular employee, John forms an LLC through which it starts advertising its project management services.
John finds a software company interested in retaining his services.
John and the software company sign a service contract for six months where John is to manage a specific project and in return he will be paid on an hourly basis.
Every month, John will send his invoices to the company and the company must pay him on a Net 30 basis.
John is responsible for having his own laptop and working tools to help the software company with its project, will determine how he will executive his work, and if he feels he must hire another person to help him in his company, it’s up to him to make that decision.
In essence, John is responsible for managing his company and doing what’s necessary to he can properly serve his clients.
Imagine that Mary finds a staffing agency through whom she finds a job in a marketing agency.
Mary is officially hired as an employee by the staffing agency but is sent over to work for the marketing agency for a certain period of time.
As a result, Mary gets her salary paid through the staffing agency but she actually does her employment work for the marketing company.
For the staffing agency, Mary is a W2 employee whereas for the marketing firm, she is a contractor.
By actually working for the marketing firm, Mary will be treated just like another employee of the marketing firm but may not necessarily have all the benefits that the firm’s regular employees may have.
Mary will have the advantage of switching companies by leaving the marketing firm and going to work for another company as a contracted employee while remaining an official employee of the staffing agency.
C2C vs W2 Takeaways
So there you have it folks!
What is the difference between Corp-to-Corp vs W2?
Which working relationship is better?
In essence, a corp-to-corp arrangement is one where you offer your services to a company through your own company (business entity to business entity).
On the other hand, a W2 contractor is a person who provides employment services to another company just like an employee and is typically referred by a staffing agency.
When a company hires a service provider in a corp to corp structure, they have a standard commercial contract between them (typically a service contract) where the two companies define the key commercial parameters relating to the project and the fees charged by the service provider.
In other cases, a company’s objective is to hire an employee but will not want to hire the employee directly.
Rather, the company will enter into a business relationship with a staffing company who will refer an employee to them on a contract.
This type of relationship is a W2 arrangement as there is an intermediate firm between the employee and the employer.
I hope I was able to provide you with the essential information you were looking for to understand the differences between W2 and Corp-to-Corp, how they are set up, their benefits and drawbacks, and how they work in general.
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Now, let’s look at a summary of our findings.
W2 vs C2C Summary
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