- 1099
- Corp-to-corp
- Type 'C' corporation
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1. 1099: When you are not incorporated (or an LLC) then you are a sole proprietor. This means at the end of the year, when you file your taxes, you fill out a schedule C, or "profit and loss for a sole proprietor." At the end of the year, if you were paid more than $600 a year by a company on this basis, the company sends you a "1099" form, which essentially reports your income to the IRS for tax purposes. Only a minority of SAP consultants operate as "1099" consultants - who are formally defined by the IRS as "independent contractors" - and this is a good thing, because in my opinion, the typical SAP consultant does not satisfy the IRS definition of an "independent contractor." I believe during an audit that the IRS would re-classify most SAP folks who work on a 1099 basis as employees, which implies a different tax liability for themselves and their employers. I'm not going to get into the full definition of what constitutes an independent contractor here, but to answer your question, one way of working for an SAP project is on a "1099 basis."
2. Corp-to-corp: The more common way of billing for SAP project work, if you are an independent consultant, is via a corporation or LLC. Therefore, your billing would be done on a "corp to corp" basis. Though in many cases, you will not bill the end client - you will bill the staffing intermediary between you and the end client. Some firms will not work with you at all if you don't have the ability to bill on a "corp-to-corp" basis, in other cases, the option is in your court to determine the billing arrangement that is best suited for your tax purposes. My personal feeling is that any SAP consultants who are in it for the long term should have some type of corp-to-corp billing setup.
3. C corporation: The C corporation is the most common form of corporation. However, many SAP consultants work through "S corporations" or LLCs. Sometimes, the latter two are called "pass-through entities" because the profits are passed through to the individual tax return and taxed only once. With C corporations, you pay a corporate tax on the profits and then a tax when you take a distribution out of the company. So, C corps are best when you plan on putting a lot of your profits back into the company to expand your business. As a general rule, if you are trying to build a larger company or consulting firm, you want to be a C corporation, but if you are more interested in pulling cash out with the least taxation, you would look at an S corp or LLC structure. This, however, is a gross simplification, and you should consult with an accountant concerning all these points as needed.
This was first published in December 2004