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Tuesday, February 14, 2012

A couple of points on working on corp-to-corp vs W2


A couple of points on working on corp-to-corp vs W2 (with no benefits)

We are talking about scenario where no benefits are being paid by working on W2.

What are equivalent rates on W2 vs corp-to-corp?
$100k a year on W2 (with no benefits) is almost equals to $109k a year on corp-to-corp (S-corporation)

Lets understand the difference of this $9,000.
Even though we mentioned that you don’t get any benefits on W2, your employer still pays FICA (which is around 7.65% of your salary upto $110k a year) and unemployment insurance tax (http://www.workforcesecurity.doleta.gov/unemploy/uitaxtopic.asp ). So when you ask to be paid corp-to-corp compare W2, you will have to ask for amount which will cover FICA and unemployment insurance tax as you are responsible to pay them when you work on corp-to-corp by starting an s-corporation. These are basic taxes that you pay anywhere in country. Apart from this, there might be other taxes. You should research about them based on the location where you are when negotiating W2 and corp-to-corp rates.

S-corporation is basically a bypass. Company pays to your s-corp and this s-corp pays you. But by doing this, you can get some tax related advantages. Let’s understand a couple of these benefits.

Health and medical and dental expense
In W2 (with no benefits) you pay for your health insurance and you don’t get any tax deduction on it in calculating itemized deduction till your total medical and dental expenses are more than 7.5% of your total gross pay.
e.g. if you are making $100k, you won’t get any health and medical and dental expense related tax deductions till your total expenses in this category is less than $7,500 for that year. For a healthy person, it is unlikely that you are going to spend $7,500 in this category.
Let’s say your health insurance is $150 a month. $150 a month equals to $1800 a year. You don’t get any deduction on this amount when working on W2.
Now if you had established s-corp, you can take this deduction. So your taxable income will be lowered by $1080.

Unreimbursed employee expenses
One does not get full Job expense and certain miscellaneous expense deduction under itemized deduction while working on W2.  You will get deduction only on the amount which is higher than 2% of your adjusted gross income.
Let’s say your Job expense and certain miscellaneous expense is $5,000 and your adjusted gross income is $100k. The amount you will include for Job expense and certain miscellaneous expense deduction will be $5,000 - 2% of $100k = $5,000-$2,000 = $3000

How would this work when you are married?
Let’s say you are married, filing jointly and your spouse is working and your adjustable gross income is $150k. The amount you will include for Job expense and certain miscellaneous expense deduction will be $5,000 - 2% of $150k = $5,000-$3,000 = $2000

Retirement accounts
In the case of W2 (with no benefits), you can contribute maximum of $5,000 to your regular IRA. You deduct this amount from your income to calculate adjusted gross income. i.e. you can take the deduction of $5,000 by contributing it to regular IRA.

In the case of corp-to-corp, you can open SEP-IRA http://www.irs.gov/retirement/article/0,,id=111419,00.html#contributions and can contribute up to $5k. It is maximum of 25% of your compensation or $50k.
So if you are making $100k, you can contribute $25k to retirement account and it will be deducted from your income while calculating your adjusted gross income.

Salary Deferral Contribution
What if you want to contribute more than allowed maximum of 25% of your compensation?
Let say you are the only member of your s-corp. you can elect salary deferral contribution. You can choose not to pay this salary to yourself in cash. Instead, you can elect to pay this into your retirement plan upto $16,500. 

9 comments:

  1. Thanks, going through this decision now. I thought the gap from W2 to C2C would be greater.

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    Replies
    1. It starts getting pretty substantial when you factor in retirement. That's a whole lot more cash you can stash away vs W2.

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  2. Very helpful and concise. Going through same decision right now. How will the length of the contract affect these calculations would be interesting to know!

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  3. I have been offered a hourly rate of 75$/hour on corp to corp. I wouldlike to know what could be net anually salary or net take home monthly pay

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    Replies
    1. smart enough to make 75/hr but cannot compute 75 x 8 x 5 x 52 ??? - jk

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    2. net, not gross

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    3. apparently cannot use google either.

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    4. Depends in what tax bracket you fall after cliaming all deductions, air fares, car allowances, phone bill for the year, etc.

      Assuming a contractor typically spends 20% to 30% of Gross Salary on travel (hotel, food, Travel, etc.) and another 10% in miscellaneous , you only take home 60% to 65% of what you actually make (my experience with past contracts).

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  4. which pay like w2 or c2c, we will get more money

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