Tax Terms in USA

  • Tax Terms: These are tax rules when we deal with the candidate for hourly basis rates. When we talk to them regarding hourly rates we also discuss regarding tax terms. The candidate has to chose at least one Tax Term from the following (W2, 1099, C2C) to decide about his taxpaying mode (to pay income tax)
  • W2: Candidate get tax paid hourly rates in W2. Our company will take care of his taxes and payroll expenses.

Actually when a contractor is on W2 we pay their income taxes (Central Income Tax, State Income Tax). We also pay all of the necessary employer taxes. These taxes include: FICA (Social Security and Medicare), FUTA (Federal Unemployment Tax), and SUI (State Unemployment Tax). So in general W2 rate to the consultant will always be lower than 1099 as we are paying employer taxes.

Generally our company calculates 12% tax on hourly rates. So if you are paying $50 per hour to a candidate, on w2 we will pay $50 – $6 (12%) = $44. It means if candidate wants to work on W2 tax term we will pay him $44/ per hour

  • Calculations of W2 Rates- It depends how much % your company deduct from the normal rates. Generally companies pay 12% less than normal rates.
  • 1099:  Candidate take care of his taxes himself. Our company pay complete amount to the candidate and he pay all his all the taxes by himself, obviously this rate is always higher than W2.

So if you have pay rate $50 per hour for a requirement, On 1099 we will pay $50 per hour to the candidate, we do not deduct any amount.

E When a contractor is 1099, we pay the contractor an amount that we do not tax. It is then the responsibility of the individual to file and pay the appropriate taxes. We do not pay necessary employer taxes which is their responsibility. So in general 1099 rates to the consultant will be higher than W2 rates. 1099 is also same as Corp to Corp (C2C).

  • Corp to Corp (C2C): It’s called Corp to Corp/Company to company. When we work with the vendor company who is providing us candidate, we work with that company on C2C tax terms.

E If we are dealing with a H1B holder or someone who is working through his employer/vendor. We work with that candidate though his employer and we do not discuss the rate with the candidate.

E Normally when we get a consultant from a subcontractor (Vendors) agency. We will do  C2C tax term.  In this case the consultant normally will be an employee of the subcontractor/ vendor. That vendor company takes care of paying taxes of the consultant.

  • Per Diem Rate – Pay only people who are on W2 contract going to other state and more than 50 miles from their hometown. They get Travel +food and living cost separately from w2 rate ( Example $50 W2 will be paid – $30 W2 +$20 Per diem). The purpose of paying per diem is save taxes on the Travel +food and living cost expenses. And the candidate has to pay taxes on his income.

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