The difference between W2 vs 1099 vs corp to corp comes down to who your employer is and who pays the taxes. On W2, you are an employee (usually of the staffing agency) and taxes are withheld for you. On 1099, you are an independent contractor who pays your own self employment tax. On corp to corp (C2C), your own company contracts with the client or agency, and your company handles everything.
Key takeaways
- W2 contractors are employees: the employer withholds taxes, pays its share of Social Security and Medicare and may offer benefits.
- 1099 contractors are self employed and pay the full 15.3% self employment tax, according to the IRS, plus their own benefits and expenses.
- Corp to corp means your business entity signs the contract and invoices for your time; you handle payroll, taxes and insurance through your company.
- A 1099 or C2C rate needs to be meaningfully higher than a W2 rate just to break even.
- Your classification is based on the actual working relationship, not the label on the contract.
Note: This article is general information for job seekers, not tax or legal advice. Talk to a tax professional about your own situation.
What do W2, 1099 and corp to corp mean?
W2 contract
You are an employee of the company that pays you, which for many contract engineers is a staffing agency. The name comes from Form W-2, the wage statement you get at the end of the year. Your employer withholds income tax, Social Security and Medicare from each paycheck and, as the IRS explains, pays the matching employer portion of Social Security and Medicare plus unemployment tax.
1099 contract
You are an independent contractor working as an individual (often a sole proprietor). The company pays you the full rate with no withholding, and you receive a 1099 form instead of a Form W-2. You are responsible for your own taxes, insurance, retirement savings and business expenses. For the employer side of this, see our post on when companies issue a 1099-NEC.
Corp to corp (C2C)
Your own business entity, such as an LLC or corporation, signs a contract with the client or staffing agency. Your company invoices for your hours and gets paid business to business. How you then pay yourself and handle taxes depends on how your entity is set up, which is a question for your accountant.
W2 vs 1099 vs corp to corp: how do they compare?
| Factor | W2 | 1099 | Corp to corp |
|---|---|---|---|
| Who you work for | Agency or client as your employer | Yourself, as an independent contractor | Your own company, contracting with another company |
| Tax withholding | Withheld from each paycheck | None; you pay estimated taxes | Handled through your company |
| Social Security and Medicare | Split between you and the employer | You pay both halves as self employment tax | Depends on your entity setup |
| Overtime under the FLSA | Possible if you are non exempt | Not covered as an independent contractor | Not covered; your company bills per contract |
| Benefits | May include health insurance, PTO, 401(k), depending on the employer | You buy your own | Your company provides its own |
| Unemployment and workers’ comp | Employer pays into these programs | Generally not covered | Depends on your company |
| Paperwork | Least | Moderate: estimated taxes and records | Most: business entity, invoicing, insurance, accounting |
| Typical hourly rate | Lowest of the three | Higher | Often highest |
How are taxes different for W2, 1099 and C2C?
On a W2, your employer calculates and withholds Social Security and Medicare taxes and pays a matching share on top of your wages. On a 1099, you pay both halves yourself through self employment tax.
According to the IRS self employment tax page, the rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. You calculate it on Schedule SE, and you can deduct the employer equivalent portion when figuring your adjusted gross income. You generally must pay self employment tax if your net earnings from self employment are $400 or more, and you may need to make quarterly estimated tax payments.
The upside of 1099 and C2C work is that legitimate business expenses, like equipment, software, professional insurance and some travel, may be deductible. The downside is that nobody is withholding for you, so you have to set money aside every month to avoid a big tax bill and possible penalties.
Recruiter tip: If you take a 1099 or C2C contract for the first time, open a separate bank account and move a fixed percentage of every payment into it for taxes the day it arrives. Ask a tax professional what percentage makes sense for you.
Do 1099 and C2C contractors get overtime and benefits?
Overtime is one of the biggest hidden differences. Under the Fair Labor Standards Act, the DOL overtime rules say covered, non exempt employees must receive at least time and one half their regular rate for hours over 40 in a workweek.
That protection applies to employees, so W2 contractors can qualify, but independent contractors do not. As the DOL notes, minimum wage and overtime protections depend on there being an employment relationship.
Not every W2 contractor gets overtime, though. The DOL exemption rules generally require exempt professionals to be paid on a salary or fee basis. One notable exception is the computer employee exemption, which can apply to hourly workers such as software engineers and systems analysts paid at least $27.63 an hour who perform qualifying duties. Job titles do not decide exempt status; duties and pay do. Ask your agency whether your role is exempt or non exempt before you sign.
Benefits follow the same pattern. W2 agencies may offer health insurance, paid time off or a retirement plan, while 1099 and C2C contractors pay for their own. When you compare offers, count benefits as part of the package; our post on base salary vs total compensation explains how.
How do you compare a W2 rate to a 1099 or C2C rate?
A higher 1099 or C2C rate is not automatically a better deal. To compare fairly, add back the costs you would cover yourself. Here is a simplified, hypothetical example using a $60 per hour W2 offer and a full time schedule of 2,080 hours a year.
| Cost to cover (hypothetical, per hour) | How we estimated it | Amount |
|---|---|---|
| W2 hourly rate offered | Starting point | $60.00 |
| Employer half of Social Security and Medicare | 7.65% of $60 (half of the 15.3% self employment rate) | $4.59 |
| Benefits the W2 employer would have paid | Assumed health insurance and retirement match, for illustration only | $4.00 |
| Paid holidays and time off you would lose | Assumed 10 unpaid days (80 hours) spread over the year | $2.31 |
| Business costs | Assumed insurance, accounting and software, for illustration only | $1.50 |
| Rough break even 1099 or C2C rate | Sum of the rows above | $72.40 |
In this example, a 1099 or C2C rate of about $72 per hour only matches a $60 W2 rate. Anything above that is where independent work starts to pay more. Also consider that a W2 role may pay overtime, while a 1099 or C2C contract usually pays straight time for every hour.
When is corp to corp used?
C2C is most common with experienced independent consultants who already run their own business and work with several clients. It lets them keep one company for all contracts, manage their own benefits and retirement plans and deduct business expenses through the entity.
Not every client or agency accepts C2C. Some only work with W2 contractors to reduce classification risk and simplify compliance. If you are new to contracting, a W2 contract through an agency is usually the simplest way to start. Our post on why you should take a contract job covers the upside of contract work in general.
What is worker misclassification and why does it matter?
Misclassification happens when someone who is legally an employee is treated as an independent contractor. It matters to you because a misclassified worker can lose overtime, unemployment coverage and the employer share of payroll taxes.
The IRS uses the common law rules and looks at three categories of evidence:
- Behavioral control: does the company control, or have the right to control, what you do and how you do it?
- Financial control: who controls the business side of the job, such as how you are paid, whether expenses are reimbursed and who provides tools?
- Type of relationship: are there written contracts or employee type benefits, and is the work ongoing and a key part of the business?
No single factor decides it. If a company sets your hours, supervises your methods, gives you a company laptop and expects you to work like any other team member indefinitely, that looks a lot like employment, whatever the contract says. If you believe you have been misclassified, the IRS allows workers to file Form SS-8 to request an official determination.
Recruiter tip: If a company offers you 1099 for a role that looks exactly like a full time job, ask whether a W2 option is available through an agency. It often protects you and the client.
What questions should you ask before accepting a contract?
- Is this W2, 1099 or C2C, and can I choose?
- Is the role exempt or non exempt, and is overtime paid at time and a half?
- What benefits are included, and when do they start?
- Are holidays and time off paid?
- How long is the contract, and is there a chance to convert to a permanent role? (See our guide to contract to hire roles.)
- How often will I be paid, and how do I submit hours?
- Are travel, per diem or equipment costs covered?
- What is the notice period if either side ends the contract early?
For a broader checklist, see our list of questions to ask before accepting a job.
Frequently asked questions
Is W2 or 1099 better for contract engineers?
Neither is always better. W2 is simpler and can include overtime and benefits, while 1099 usually pays a higher rate but shifts taxes and costs to you. Compare the true take home value using a break even calculation.
Why do C2C rates look so much higher than W2 rates?
Because your company is covering costs a W2 employer would normally pay, like the employer share of payroll taxes, benefits, insurance and unpaid time off. The higher rate is partly compensation for those costs.
Can I switch from 1099 to W2 in the middle of a contract?
Sometimes. Ask the agency or client whether they can move you to W2, but expect the hourly rate to change to reflect the taxes and benefits the employer takes on.
Do I need an LLC to do corp to corp?
You need some kind of business entity to contract company to company, and many contractors use an LLC or corporation. The right structure depends on your taxes and goals, so talk to an accountant before you set one up.
Do W2 contractors through an agency get unemployment?
W2 employees are generally covered by unemployment insurance because the employer pays into the system, but eligibility depends on your state’s rules and why the assignment ended. Check with your state unemployment office.
Ready to find your next contract, contract to hire or direct hire role in engineering or IT? Our recruiters can walk you through W2 options and what each role really pays. Browse our open engineering and IT jobs to get started.
