An important question during most interviews in the HCIT Consultant industry is: Do you prefer W2 Hourly, 1099 or Salaried employment? Normally the candidate will understand the distinction between Salaried employment and W2 hourly or 1099 (Contract), but many questions arise during this part of the interview as the candidate tries to determine which scenario is best for them, particularly if it is someone that is new to consulting.
I won’t delve much into salaried employment, which is pretty self-explanatory. Salaried employment or Permanent employment is when you accept an internal position with a company where you will earn a salary, receive full benefits and any other bonuses that company may offer. You can consider it like a marriage… you go into it, hoping it will last forever.
The 2 models I would like to dig into are W2 hourly and 1099 Contract and what the distinctions are between them. Consultants that have been in the industry for years normally prefer one to the other, but are often open to either depending on the company they will be contracting for. Frequently when speaking to folks that are just venturing into the consulting arena, they express confusion over which option is best for them. Below is a simple break down that covers the basics.
W2 Hourly: In layman’s terms W2 hourly is like short term employment. You receive an hourly rate for your work, you will often have the opportunity to opt into partial benefits, you will fill out a W2 Tax Form and the company will take out taxes prior to paying you. Your “employment” will last for the duration of the engagement that you have accepted. At the end of the engagement you will be free to accept another engagement from another company or if you’re working for a company that is on their toes… they may have a new engagement to offer you and you can extend your time with them.
1099 Contract & Corp to Corp: The difference between 1099 and Corp to Corp is simple. In the case of 1099 you will use your social security number and be paid as an outside contractor by the company, this scenario is rarely practiced anymore. In the case of Corp to Corp you will have created a legal business for yourself (LLC or S-Corp etc) by registering through your state and you will sign a business agreement/contract between your company and the firm you are going accept the engagement through. Many firms are trending away from 1099 and Corp to Corp agreements. The reasoning behind this trend is related to the IRS cracking down on companies that utilize independent contractors when they deem the company should have brought the consultant on as a W2 hourly employee.** Often times the lines are blurred when discussing 1099 vs Corp to Corp because the term “1099” has become a catch-all phrase for both. As your own business entity you will be required to invoice the company you are contracting for. You will be paid an hourly rate for your services.
Which is best for you?
Salaried/Permanent Employment Benefits
- Security… knowing that there is a sales person dedicated to keeping you busy so you dont have to sell your own services.
- Full Benefits, bonuses, PTO, 401K etc
- Regular pay and travel reimbursement schedule
- Laptop & cell phone provided
- Company covers liability insurance
- Corporate Credit Card for travel (in most cases)
- Being on a consistant team
Salaried/Permanent Employment Drawbacks
- Income is often less than what you can bring home as a W2 Hourly or Independent Contractor
- You don’t always have the freedom to choose your engagements and must go where the company sends you.
W2 Hourly Benefits
- Company deals with the taxes and covers liability insurance
- Option for partial benefits (in most cases)
- Laptop provided (in most cases)
- Regular pay and travel reimbursement schedule
- Freedom to choose your engagements
- Potential for higher income vs Salaried employment
W2 Hourly Drawbacks
- Responsible for finding your own engagements
- Lack of full benefits
- Must pay your own taxes on a quarterly basis*
- Must provide company you are contracting for with invoices from your business
- Must maintain your own liability insurance
- Must provide your own benefits
- Often paid 30 days on invoice
- In some cases responsible for your own travel expenses
** Tax Lawyers have explained that an old and somewhat obscure Federal Tax Law (#1706 from 1986) states that if the I.R.S. determines that a self-employed worker should have been an employee, it imposes substantial back taxes, penalties and interest on the hiring company — even if the self-employed worker fully paid his/her taxes. For this reason many companies are shying away from even using Corp to Corp contractors unless those contractors can prove that their business actually employs other people beside themselves OR if they are in a partnership with someone other than family members. For more information on this law consult your local Tax Attorney.
If you’re a seasoned consultant and have comments about these options please post them!!