Small business owners prefer to hire contractors for completing a specific task. When a business decides to go for a corp to corp(C2C) arrangement, instead of hiring regular employees, it’s important to know how it works. What is Corp to Corp? Can you hire a contractor to benefit your business? Or, are there any disadvantages?
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What is the meaning of Corp to Corp(C2C)?
This term simply means that a corporation will be paying another corporation for its services. Here, your corporation will be dealing with an individual who owns a corporation. A C2C arrangement is similar to 1099 because the contractor is obliged to pay his taxes. A C2C contractor sets the benefits for their corporation. Therefore, it’s responsible for liability insurance. Because the Contractor has his own business, social security taxes, and payroll taxes is his job. Besides, C2C is beneficial for the employer because the quality of work is assured. The employer’s risk of misclassifying the worker is less.
Can a C2C arrangement be more profitable for small businesses?
Some benefits urge the employer to choose a C2C arrangement:
1. Employment taxes are less:
The contractor simply raises an invoice, and the employer pays for the services. Unlike hiring an employee, social security taxes, Medicare taxes, state unemployment taxes and Federal unemployment taxes are not the employer’s business.
2. No Risk of misclassifying an employee for an independent contractor:
Independent contractors are self-employed. The risk comes when the government decides it’s an employee. Here, IRS rules are helpful. If the offered services of the contractor are regulated by the employer, then it’s an employee. However, a worker whose services cannot be curbed is an individual contractor (or C2C).
Retaining an employee makes the employer subject to FICA and income tax withholding. It’s risky for the employer to mistake an employee for an individual contractor. For this blunder, the employer needs to pay the penalty.
3. Less Legal liabilities:
Hiring an employee means taking the obligation for the employer’s work-related accidents. On the other hand, a C2C arrangement saves a business from most of its liabilities.
It is crucial to note that a structured LLC is profitable for a contractor too. For instance, if a creditor files a lawsuit or the contractor’s business goes bankrupt. The owner’s savings, vehicle(s), house(s) are not in trouble.
What are the disadvantages?
The process is long:
Lengthy paperwork for the ownership and nuances of the organisation, corporate bylaws, authorizing a board of directors, publishing stock certificates, and more are often lengthy.
Formalities, protocols and structure:
Following the legal protocols takes a great deal of time and energy. To maintain a corporate status, formalities and regulations such as formulating annual reports, following bylaws, holding meetings, etc should be followed.
High taxes:
Most C-corps face high taxes, both on the shareholder and entity level. Operating as an S-corp eliminates this risk, but the IRS charges S-corps as C-corporations once the legal requirements are left unfulfilled. Again, an S-Corporation is simply taxed on the shareholder level, and not on the entity level.
Should you choose a C2C arrangement?
Long term commitment is not expected in the C2C arrangement. Paperwork and record-keeping are loose because the business doesn’t need to withhold taxes to maintain employee’s data. One can interact with C2C contractors when required. However, it can be more costly than 1099(individual contractor) and W2 employees. Therefore, only choose a C2C arrangement for the short term. W2 employees are regular employees, they are the best for long term necessities.
Final Verdict:
Small Business owners usually don’t need regular and part-time employees. Therefore, it makes sense to hire a C2C contractor. If the employer does some research, it’s possible to find an inexpensive contractor.
