In a nutshell , "being paid on a W-2" means you have an employee/
employer relationship with the entity that is paying you. If a
recruiter says "I will pay you on a W-2," that means you become an
employee of the recruitery (or the client itself) for the duration of
the contract. The employer pays your share of social security taxes
and withholds taxes from your paycheck, etc. As a "W-2 employee" you
MAY be eligible for health insurance and other benefits offered by th
employer to its employees, as well as unemployment compensation at the
end of the contract.
If you are "paid on a 1099" you are an independent contractor, and
responsible for paying both the employee and employer share of social
security taxes. You may also be required to purchase your own
liability and errors/ommissions insurance.
You don't have to "form a corporation" to be paid "on a 1099 basis,"
BUT some clients want to see evidence that you are in fact an
independent business, and forming a corporation is one way to do
that. Lots of miscellaneous income is reported on 1099s, such as
honoraria for speaking at a meeting, payments to review a book for a
publisher, or short term work assignments. If you have kids, and a
babysitter whom you pay more than (I think) $600 a year, you have to
give her a 1099 documenting what you've paid her. The babysitter does
not need to "form a corporation."
BUT, setting up a corporation can be time consuming and expensive,
depending on what state you live in (here in the USA). One important
reason why people incorporate when they set up a new business is to
create the "corporate veil" between their personal assets and their
business assets. If there is litigation over some issue, one of the
first things the other side is going to do is attempt to "pierce the
corporate veil" and try to come after your personal assets. For
example, that happened to a friend of mine who is a dentist who formed
a small corproation for his practice that included two or three other
dentists. When one of other dentists sued the remaining owners (I
can't recall the details of the suit now), the first thing the
plaintiff did was attack the legal basis of the corporation in an
attempt to expose the personal assets of the defendants. Among other
"attacks" was that the "corporation" was formed using an online tool,
was incoporation in Delaware even though all business was done in
In the SAS programming world, some pharmas (and other companies) will
only bring short-term workers in to their organizations if they are
"W2 employees" of a larger placement/recruitment firm. This
arrangements, while often difficult for the programmer, give the
employer a certain level of legal protection against claims that
"contractors" were really "employees," etc. If the recruiter offers
you the "payment on a 1099" option you will most likely have to
provide proof to the recruiter, and the client, that you have
liability and/or errors and omissions insurance, which can be
expensive to obtain.
In the past, I've mentioned my strong feeling that it makes no sense
"to incorporate" to become a SAS Software contractor doing on-site
work for clients, especially if you anticipate having just one or two
short term jobs. It isn't worth it. I think it would make more sense
to do a W2 arrangement with the recruiting firm. While you may be
paid less per hour, your taxes are being paid and many of the
unpleasant bits of independent contracting (e.g., payroll, making tax
payments, etc) are handled by others. And, there is a chance you can
get health insurance, paid vacations, sick leave, etc while you are
"on a W2" with the client. In the long term, I do not think there is
any financial benefit to going through the steps to incoporate for the
purpose of a short term contract as a SAS programmer for a pharma
I hope this information is of use to you.
Sierra Information Services
On Jan 26, 5:36 am, John Uebersax <jsueber...@gmail.com> wrote:
> Recruiters often ask me, "do you want to work on a W2 or a 1099
> Can someone help me understand what is required to work on a 1099
> 1. Must I take legal steps to form a corporation?
> 2. Or can I simply operate as a sole-proprietorship?
> 3. I mainly work in the pharma area. Will companies do business with
> me directly as a contractor if I am not incorporated?
> 4. Or perhaps it might be better to ask the question in an open-ended
> way: what steps are required to contract directly with a pharma
> If there's a better discussion group in which to ask these questions,
> please let me know (although I suppose there are many other people
> here who are intestested in this topic).
> Thanks in advance
> John Uebersax