Corp-to-corp vs W-2: what the difference actually means

In a corp-to-corp arrangement — usually written C2C — the contractor has their own legal entity, typically an LLC or an S-corporation. The agency signs a contract with that entity, not with the person. The entity invoices for hours worked, and the agency pays it like any other vendor.

The contractor then decides how to pay themselves from their own company, and is responsible for their own taxes, their own insurance, and their own benefits. The agency withholds nothing and reports nothing on a W-2.

On a W-2 contract the agency employs the worker directly for the duration of the assignment. It runs payroll, withholds federal and state income tax, pays the employer half of Social Security and Medicare, carries workers' compensation and unemployment insurance, and in many cases offers health benefits and paid time off.

The worker gets a W-2 at year end and files as an employee. The administration sits with the agency, which is precisely what the employer is paying the agency to absorb.

A 1099 arrangement treats the worker as an independent contractor as an individual, without a company in between. It is less common in staffing than people assume, because the IRS tests for independent contractor status are strict and misclassification is expensive. Direction, control and the economic reality of the relationship all matter, and a worker sitting at a client's site under the client's supervision for nine months looks a great deal like an employee.

Many agencies simply do not offer 1099 engagements for that reason, and offer C2C or W-2 instead.

A C2C rate is almost always higher than the W-2 rate for the same work, and the gap is not generosity. It is the cost the contractor now carries themselves.

On W-2 the agency pays the employer portion of FICA — 7.65% — plus unemployment insurance, workers' compensation, and any benefits. On C2C the contractor's own entity pays all of that, along with self-employment tax, their own health insurance, their own accounting, and their own unpaid time off.

A reasonable rule of thumb is that a C2C rate needs to be meaningfully above the W-2 rate before the two are equivalent in take-home terms, and the exact gap depends on your state, your entity structure and what benefits you would otherwise receive. Compare the two with an accountant rather than by eye.

An agency running both engagement types needs its systems to handle both. Pay rates on W-2 placements flow into payroll; C2C placements generate vendor bills instead, paid against the subcontractor's invoice. Both still have to produce a client invoice at the right bill rate.

This is why vendor management and billing matter as much as recruiting in an agency platform. A system that tracks only employees will not handle a C2C bench, and a system that tracks only vendors will not run payroll.