The most common question a vendor (staffing agent) and/or client (employer) will ask you (independent contractor) when starting a new assignment is whether you want to work as a w-2 contractor, 1099 contractor, or corp-to-corp contractor. Why do they ask this question? First, it defines the contractual relationship between you and the vendor in terms of payroll, employment benefits, and tax consequences. Second, it clarifies the relationship between you and the client (employer) as it relates to independent contractor compliance laws and work-related liabilities. Third, it determines who has control (you or the vendor) over where, when, how, and who you work for. So, it is a very important question that will affect both your work and personal situation.
But even though it may be posed like a multiple choice question, there is no simple black and white answer. Take my story for example. I started my consulting career as a full-time traditional management consultant. I was later offered a w-2 engagement with an approved vendor for one of my former clients. During that time, I began building a large network of connections and clients. When I was ready both financially and emotionally, I found a good lawyer to help me transition from a w-2 to a 1099 contractor. Then, with the advent of the new independent contractor compliance laws, more and more vendors began asking me to work as a corp-to-corp contractor. I weighed the pros and cons and converted to an LLC.
Therefore, it is not uncommon for new independent contractors to start off as one type (because it’s appropriate for their current situation) and then change to another later on. But, it is important to understand the differences as shown in the table below.
|IRS Definition||W-2 contractors are defined as leased employees. A firm furnishing workers to other firms is the employer of those workers (leased employees) for employment tax purposes. For example, the staffing service enters into contracts with the clients under whom the clients specify the services to be provided and a fee is paid to the staffing service for each individual furnished. irs.gov source: Leased Employees||A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation. irs.gov source: Sole Proprietors||In general, a corporation is formed under state law by the filing of articles of incorporation with the state. The state must generally date-stamp the articles before they are effective. You may wish to consult the law of the state in which the organization is incorporated. irs.gov source: Definition of a Corporation|
|If your length of contract is....||Less than 1 yr; dont need to bother incorporating or itemizing your business expenses.||Greater than 1 Year||Greater than 1 Year|