C2C vs 1099 vs W-2: what founders and developers need to know

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What each one actually means

W-2 is straightforward. The employer withholds taxes and provides benefits.

1099 means the work is done as an individual. The client sends a 1099-NEC at year-end. The contractor owes both halves of FICA (15.3% before income tax starts), buys their own health insurance, and is personally liable for anything that goes wrong. If the IRS decides they were really an employee, both sides have a problem.

C2C (corp-to-corp) means the contractor has a business entity, usually an LLC, which contracts with the client company. The client pays the LLC; the LLC pays the developer. With an S-Corp election the developer pays themselves a “reasonable salary” (with payroll tax) and takes the remaining profit as distributions (without it). It’s legal, IRS-sanctioned, and how many full-time contractors operate.

How much more do you keep with C2C?

Here is $150,000 of gross income under each model, computed with the same model as our calculator: single filer, 2026 federal tax, no state tax, $7,200 a year of health insurance for the contractors, and a 60% S-Corp salary.

S-Corp salary $90,000; its business costs include $3,000 of corp overhead. Self-employment tax is on 92.35% of net earnings, and half of it is deductible. Both contractors deduct health insurance and take the 20% QBI deduction on business income (for the S-Corp, only on profit after salary). Business costs and health insurance are our assumptions.

The W-2 employee takes home the most in raw dollars here, plus benefits, but the company pays another $11,475 in employer FICA and the cost of those benefits on top of the salary. The same $150,000 paid to a contractor is their whole package.

Between the two contractors, C2C comes out $726 ahead of 1099 at this income with a 60% salary. Many guides quote five-figure savings, but they usually leave out the 20% QBI deduction the 1099 contractor also gets. The salary split matters more than anything else:

C2C (S-Corp) take-home minus 1099 take-home at the same revenue, by S-Corp salary as a share of revenue. Single filer, no state tax, $7,200 health insurance, $2,400 business expenses for both, plus $3,000 of corp overhead for the S-Corp.

The S-Corp, explained

This is the main reason to go C2C instead of 1099. Here is what happens:

1. You form an LLC. State filing fees run from $40 (Kentucky) to $500 (Massachusetts), and some states add an annual fee (up to $800 in California).
2. You file Form 2553 with the IRS to elect S-Corp tax treatment. The LLC stays an LLC; only its tax treatment changes.
3. Your LLC is paid $150,000 by the client.
4. You pay yourself a reasonable salary of, say, $90,000. The company withholds tax like any employer, pays the employer half of FICA ($6,885) and withholds your half ($6,885).
5. What’s left after salary, payroll tax and expenses comes to you as a distribution. No payroll tax on that part. You still pay income tax on it.

In our $150,000 example, the S-Corp pays $13,770 of payroll tax against $20,855 of self-employment tax for the 1099 contractor: $7,085 less. Two things claw that back. The S-Corp pays about $3,000 a year more for accounting, payroll and state fees. And the QBI deduction (20% of qualified business income) covers only the S-Corp’s profit after salary ($8,103 deducted, versus $22,774 for the 1099 contractor), so the S-Corp owner pays $3,359 more federal income tax. Net: $726 ahead of 1099.

The “reasonable salary” question

The IRS requires S-Corp owners who work in the business to pay themselves a reasonable salary before taking distributions. There’s no fixed number: it should be roughly what you’d pay someone else to do the same work. BLS wage data is a common reference point; the national median for software developers is $135,980. The IRS has successfully challenged owners who paid themselves token salaries, so very low splits are a risk.

A CPA should set this number. S-Corp payroll and tax filings are not a good DIY project.

What this looks like from the hiring side

If you’re a founder, CTO or hiring manager deciding how to engage a developer:

The 1099 arrangement is the simplest on paper but carries real risk. If a contractor works full-time on your product, uses your equipment, follows your schedule and has no other clients, the IRS may reclassify them as an employee, which means back taxes and penalties.

C2C avoids most of this: two businesses contracting is exactly what the IRS expects to see. The contractor has their own entity, insurance and tax obligations.

Agencies typically bill 2–3× what the developer would earn on W-2. Contracting directly cuts out most of that margin. See contract rates for each stack, or compare a contractor’s annual cost with an employee’s.

When each model makes sense

W-2 if:

The developer wants stability and benefits, is early in their career and wants mentorship, or the role is long-term and core to the product. The BLS median for US software developers is $135,980 (mean $148,100, May 2025).

1099 if:

It’s side work on top of a W-2 job, the gig is short, or the income is low enough that S-Corp overhead outweighs the saving. A sole proprietor keeps the full QBI deduction below the income threshold ($201,750 of taxable income for a single filer in 2026).

C2C if:

Contracting is the main income, you can justify a salary well below revenue, or you’re above the QBI threshold, where a sole proprietor’s deduction phases out but an S-Corp’s is protected by the wages it pays. You also get liability protection and a structure enterprise clients prefer; many won’t engage individual 1099 contractors at all.

Setting up for C2C

1. Form an LLC in your state through the Secretary of State. Filing fees run $40–$500; see your state on our rates by state pages.
2. Get an EIN. Free from the IRS website. This is the business’s tax ID.
3. Open a business bank account. Keeping business and personal money separate matters for liability protection.
4. Elect S-Corp status with Form 2553, within 2 months and 15 days of the start of the tax year it should apply to (late elections can be accepted with reasonable cause).
5. Set up payroll for your own salary, through a payroll service or your CPA.
6. Get insurance: general liability, and health cover if you don’t have it through a spouse.
7. Find a CPA for S-Corp tax returns and quarterly estimates.

Our calculators assume $3,000 a year of overhead for all of this; change it to match your quotes.

The rate conversion

Moving from W-2 to contracting, you need to charge more to cover what your employer used to pay. A rough formula:

Rates vary a lot by stack, experience and location. Use the rate calculator or browse rates by stack.

What you should actually do

Don’t form an S-Corp for the tax saving alone at modest income: once the QBI deduction is counted, the gain in our model is a few thousand dollars at best (the largest in the table above is $4,957, at $200,000 with a 50% salary), and it can be negative.

If contracting is your main income, have a CPA model it with your state, your salary split and your expenses. The liability protection and the clients who only work C2C may matter more than the tax.

And if you’re hiring: engaging contractors C2C is cleaner on classification, usually cheaper than an agency, and the contractor keeps more of the rate.

Questions

Informational only: tax rules change and state rules vary. Talk to a CPA before making entity and tax elections. Sources: BLS Occupational Employment and Wage Statistics (May 2025), IRS 2026 tax tables, IRS Form 2553 instructions; LLC fees from our state data.