Consultants: W-2, 1099 or Corp-to-Corp?

This seems to be a question in the mind of lot of Consultants who are trying to figure out : I have a new consulting gig, should I go W-2, 1099, Corp-to-Corp?

So What is the answer?
I have tried to summarize the answer in a simpler way


The biggest factor that should impact your decision is your own personality. The three options (W-2, 1099, and Corp-to-Corp) vary in complexity with W-2 being the simplest and setting up your own corporation the most complicated. You need to weigh the trade-offs of each approach and pick the one that fits your lifestyle best.

Based on your personality, here are the three options:

Consider W-2

If you're the kind of person that absolutely hates tax time, procrastinates until 10pm on April 15th, and would rather get a root canal than fill out a government form, you should consider W-2. You may not find the extra tax savings worth the headaches.

Below are the Pros and Cons for  Considering:

W-2 Pros:

• Easiest and simplest option.
• No bookkeeping needed other than submitting time sheets.
• Some limited benefits may be available.

W-2 Cons:

• Limited ability to defer income if a 401(k) benefit plan is unavailable.
• Deductibility of unreimbursed business expenses and medical insurance premiums are very limited.
• Getting health insurance coverage if none is provided can be a challenge.
• Any benefit package is likely to be less generous than if you were a regular employee of the client

 

Are you detailed-oriented? Consider Corp-to-Corp

If you like to balance your check and credit card statements to the penny every month, you always get your tax returns in early or, ideally, have some accounting background, setting up and maintaining your corporation may not be that big a deal.

Corp-to-Corp Pros:

• No self-employment tax.
• Using small business retirement plans, you can defer tax on a larger percentage of income.
• Double taxation of earnings is avoided as compared to regular corporations.

Corp-to-Corp Cons:

• Most complicated option. Much more bookkeeping and tax reporting required.
• Difficult to organize and dissolve.
• Some states have a minimum tax you will have pay regardless of profitability.
• You must receive at least some salary from the corporation, which means the corporation is subject to payroll taxes and filing.

Do you like to challenge authority? Choose 1099 at your own risk

If you are  not planning to go self employed for long term or taking an assignment on part time basis , you might consider the 1099  option. But there are some downsides to being self-employed that will probably lead you to choose one of the other two options: like your return is more likely to catch the eye of the IRS than any of the others discussed here.

1099 Pros:

• Easy to get started.
• Easy to discontinue when your contract ends.
• Losses might be used to offset other income (limits apply).
• Small business retirement plans offer the opportunity to defer more current income than traditional IRAs.
• You might be eligible to take the Home Office Deduction.

1099 Cons:

• Unlimited liability for the owner.
• All profit is subject to self-employment tax in addition to the income tax.
• More administration and bookkeeping than W-2 option.
• You must make quarterly estimated tax payments