What does Corp-to-Corp contracting mean exactly?

Question

I have seen the term "Corp-to-corp" used in various contracting ads. I am guessing that this means that I have a corporation and it, as an enitity, is billing the client instead of me as an individual and the corp then pays me. Is that correct?

What are the ramifications of this versus (a) contracting through another firm (W2) or (b) on your own (1099)?

EDIT: This refers to the United States but a wide varity of answer would help those in other places as well.

Answer 1

Yes, I believe that is correct.

Somebody correct me if I'm wrong, but they want to do corp-corp to avoid legal issues later on, where either you or the government claims that you were an employee, and they need to pay you some type of extra compensation, or the gov. your withheld taxes.

A few years ago I was at one company who had a rule about not having any contractors for more than 18 months. Even corp-corp.

Update : Contract work at Microsoft for older workers? suggests that Washington state contractors can only work for a company for 9 months of a year.

Answer 2

Typically corp-to-corp agreements are cheaper on the contracting organization (say KForce) because it relieves them of certain legal requirements and other liability costs. For example, on a corp-to-corp arrangement they would not have to pay workers comp or unemployment insurance for you, as well as no payroll taxes. This amounts to real dollars and usually can mean as much as 5-10 per hour bump in the rate they are willing to give you. Most of these orgs also carry general liability insurance for each contractor and that has a cost which is in your hands if you go this route.

All together I think it is a better deal for both parties if you can work this way, there is more risk and liability on your part but if you have a proper level of protection personally (ie the liability shield of a corporation) then it should work out good.

Also, I think your wrong about the billing. If you are working at XBank on a contract from KForce and your corporation is MyCorp then MyCorp will bill KForce who will then handle billing with XBank. The nice thing is that KForce (or whoever else) acts as a default shield for you, if the client doesnt pay for whatever reason KForce will still pay you in most cases.

Answer 3

To preface, I am not a lawyer. This is solely based on my experience as a developer.

Officially, corp-to-corp means what you suggest: that you have a corporation, which bills the client directly and then pays you. However, in many cases, the term "corp-to-corp" is used to mean any 1099 consulting position. Because very few independent developers are incorporated, many firms that advertise "corp-to-corp" will accept an invoice with a DBA name marked "make all checks payable to ."

It's worth finding out which is which. Initial incorporation can be fairly inexpensive (my last one cost US$700.) But, the bookkeeping and tax structure can be a lot more expensive than a single contract is worth.

Answer 4

Useful information here:

http://www.biztaxtalk.com/node/3

I do corp-to-corp myself.

Answer 5

Assuming the U.S. (since that's what your profile says), the differences are:

1. If you own a corporation, there's more reporting to the IRS and state (quarterly for small business and regular corporations) and you pay payroll taxes quarterly (or more, depending on your payroll amount).
2. Corporations and LLC's can take more exemptions than 1099's (technically, a corp-to-corp arrangement also often receives a 1099 so it's more accurate to call "1099" self-employed or schedule-C [schedule-C is where one reports earned income for which they did not receive a W2]).
3. Generally, you get paid a lot less as a W2 contractor. There are various reasons for this (vacation, healthcare coverage, etc.)
4. Besides the quarterly (or more) payroll tax deposits to the IRS and state, you must also prepare the year-end W2 and W3 for the employees (yourself) and the social security administration. And, of course, you must do the year-end tax return for the fed (1120) and the state (these are due March 15 instead of April 15 -- a month earlier).
5. You (usually) must invoice your client (if you're working through a contractor, then you'd be invoicing them, not the client you work at), for each period specified in your contract paperwork. Often it's every two weeks, but could be less or more. This is over-and-above the timesheet requirement.
6. Corp-to-corps are usually paid net-30, meaning you won't see any money until 30 days after your first invoice is sent (assuming they pay on-time). So, if the contract says you invoice every two weeks, and the payment terms are net-30, you won't see a dollar until approximately 40-45 days after you start working. This can be a killer if you're not prepared.

The risk and cost to you as a W2 contractor are nill. Usually, to do corp-to-corp, you must carry your own liability insurance (for me, in AZ, it's about $1,500/yr, yours may vary significantly depending on the nature of the contract work and your state). There are more risks and more paperwork as you move from W2, to self-employed/schedule-C/1099, to corp-to-corp, as well as more advantages. There are a bunch of start-up costs for a corporation, depending on which state you do it in (CA is very expensive, whereas AZ is pretty cheap). In some states it's easy enough to do on your own, in others, it's easier to have a lawyer take care of it for you.

Doing payroll can also be a pain as a corporation. You can do it by hand (I did for an entire year), or you can get QuickBooks and let it do it for you (that's what I do now, and it's way easier). Also, you'll probably need an accountant, although, again, I did my own accounting for a while (it's easier if you're by yourself. As soon as you have a partner, it becomes complicated. More employees are actually not at all difficult, just partners/joint owners because of the Schedule K-1).

As a corporation, it's also a good idea to have a separate bank account and credit accounts for the corporation to make sure your stuff stays separate. The IRS doesn't like it when funds mingle and with separate accounts it's easy to show they haven't.

As you can see, it's not merely just, "uuuum, I choose option B,", there's a lot more to it.

One last note: if you do just plain 1099/self-employed, you will probably need to make quarterly estimated tax payments or else you'll owe interest and penalties when you do your personal 1040 at the end of the tax year.

Edit: one last thing I thought of re-reading one of the other answers: as a corporation, it's your responsibility to make sure your clients pay you. Sometimes (a lot of times) they pay late. Sometimes they don't pay at all. It's not unusual to have clients go 90 days past due on invoices. You need to build up a cash cushion so you can handle that. You also have to weigh your ability to deal with deadbeat clients. This is probably the worst part of doing corp-to-corp contract work.

Answer 6

i have a question. I have a company that wants me as a corp to corp and i have snet them my gl insuarance and now they are asking for workers comp? Do i have to provide that? I thought that was on them?

Thanks-