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Saturday, July 30, 2011

Employment Types


1.   Contract - Corp-to-Corp

Definition: Corp-to-Corp the client, a corporation, pays to the business entity of US Citizen or Green Card Holder, which is organized as a corporation, for the services rendered. In other words any employment where the contact is between two (2) companies is called Corp-to-Corp.

Corp-to-Corp employment contract can happen in 2 cases.

Case – I: Any U.S. Citizen or any Green Card Holder can incorporate a company. Usually, people register a company to avail the tax benefits or save tax. This is a complicated set-up process. The person incorporating the company (Company A) can be the sole worker of the company and can take up employment with another company, a client (Company B). The client(Company B) will make the payment for the services rendered by the consultan tto the corporation that the consultant owns. The consultant can then draw salary from his own company and pay tax. The client in this case is not liable to pay any tax on behalf of the consultant.

Case – II: This can also happen when a client company hires a consultant with H1B VISA. H1 is works permit VISA for all professionals who are neither US citizen nor Green card holder. In this case the consultant has an employer in the US,a registered corporation. This company allows the consultant to work for another company, a client, but the contract is signed between the employer company and the client. The consultant is a full time employee of his own company but a consultant with the client company.

Payment Terms: In this scenario the client company pays to the consultant’s company directly and does not deduct any tax, as payment of tax is the liability of the corporation rendering services.

2.   Contract – Independent (1099)

Definition: This is actually sole proprietorship concern also called Independent. In other words a sole proprietorship is an unincorporated business that is owned by one individual. It is the simplest form of business organization to start and maintain. The business has no existence other than the owner. Its liabilities are the owner’s personal liabilities.

Payment Terms: In this scenario(1099) the client company pays directly to the independent contractor and does not withhold any tax.

3.   Contract – W2

Definition:This is the simplest option of all other options. There is no need of book keepingas is the case other options like Corp-to-Corp and 1099. In this case thewages of the contractor are subject to the same tax withholdings as a regularemployee of the client. In such cases the liability of depositing tax is withthe employing company. The approximate percentage of benefits and taxes isabout 12.5 to 15% percent in some cases.

Conclusion

 A 1099 employee is in most cases a temporary employee (technically, not even an "employee"). Because they are not permanent, they do not need to complete a W-4 or have the employer withhold taxes. They are responsible for paying their taxes directly to the IRS. The IRS requires that the employer report the earnings paid on a form 1099. The IRS would rather put the burden of tax withholding on the employer and therefore has fairly stringent rules regarding when someone can be considered a 1099 employee.

Corp-to-Corp– Indicates that the employer would prefer to deal directly with anothercorporation. The main reason for this preference is to avoid some of thepotential liability that might exist in dealing with an independent contractoron a 1099 basis. This would include corporations dealing directly with othercorporations or corporations dealing with individuals who have incorporated.

A W-2 employee is an employee whose taxesare withheld by the employer and the earnings are reported to the IRS at theyear-end via a W-2. The W-2 employee completes a form W-4 at the beginning oftheir employment to instruct the employer on how to withhold taxes. Thiseliminates any possible issues that may arise with the IRS regarding employmentstatus.

 Important: Keeping in mind the above details we must now understandthe contract fees payable under different work authorizations. Lets assume thatthe client agrees to pay the contractor $ 60per hour. The chart belowexplains the final payment and deductions, if any, as applicable and also showsthe net amount that is finally paid to the contractor under each employmentauthorization type.

Corp-to-Corp

Independent (1099)

W2

Client
Deductions
Contractor
Client
Deductions
Contractor
Client
Deductions
Contactors
$ 60
Nil
$ 60
$ 60
Nil
$ 60
$ 60
12.5 to 15% of $ 60
$ 60 – deduction


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