Contract roles come in three flavors. The label on your offer decides who withholds your taxes, who insures you, and what happens when the project ends. Here is each one, plainly.
W-2: The agency employs you
On a W-2 contract, the staffing agency is your legal employer. It withholds federal and state income tax, pays half of your Social Security and Medicare (7.65%), carries workers comp, and pays into unemployment insurance, so you can qualify for benefits if the contract ends. Many agencies add health coverage and a 401(k) after a waiting period. We do, and this is how we engage most of our contractors. Least paperwork, most protection.
1099: You work for yourself
As a 1099 independent contractor, nobody withholds anything. You invoice, then pay self-employment tax of 15.3% plus income tax through quarterly estimates. No unemployment, no workers comp, no benefits. One caution: the IRS tests who controls the work. If the client sets your hours, tools, and methods, you may be misclassified, and that risk lands on both sides.
Corp-to-corp: Your company bills theirs
In a corp-to-corp (C2C) arrangement, your own LLC, S-corp, or incorporated company signs the contract. Rates often run 10 to 20% higher because the client pays no employer taxes. In exchange, you run payroll, carry business insurance (clients commonly require $1 million in general liability), and handle bookkeeping and filings. It tends to pay off for contractors billing steadily, often around $80,000 a year or more.
| Factor | W-2 | 1099 | Corp-to-corp |
|---|---|---|---|
| Who employs you | The agency | No one; you are self-employed | Your own company |
| Taxes | Withheld each paycheck | Quarterly estimates, 15.3% SE tax | Your corp runs payroll |
| Benefits | Often health and 401(k) | None provided | Whatever your corp buys |
| Insurance | Agency carries workers comp | Your responsibility | Your corp's policies |
| Best for | Most contractors | Short projects, multiple clients | High earners with steady billings |
A note for Canadian contractors
In Canada, the same split shows up as T4 versus incorporated. T4 through an agency means tax withheld, CPP and EI contributions, and a T4 slip each February. Incorporated contractors bill through their own corporation, but watch the personal services business rules: if you work like an employee, the CRA can strip the small-business tax rate.
Four questions to ask before you accept
- Which arrangement is this, and can I see it in writing before I sign?
- What is the equivalent W-2 rate, so I can compare offers fairly?
- If this is 1099 or C2C, what insurance am I required to carry?
- What happens at contract end: extension odds, notice period, and unemployment eligibility?
VP Client Success, Harbor Recruitment