Technology work comes in many legal and tax forms: a W-2 job with a staffing firm, a 1099 contract, or a corporation-to-corporation (C2C) arrangement through your own company. The same developer, analyst or architect can be taxed very differently depending on how the engagement is set up. Consultants in Naperville, Aurora, Schaumburg and Chicago's tech corridors often work for clients in several states, which adds another layer. This page explains the tax issues to compare before you sign.
Three ways to be paid
| Setup | How you are paid | Main tax points |
|---|---|---|
| W-2 employee of a staffing or consulting firm | Salary or hourly wages | Withholding by the firm; no deduction for unreimbursed costs; per diem only if paid under an accountable plan |
| 1099 independent contractor | Direct payments from the client | Schedule C; self-employment tax of 15.3 percent up to the Social Security wage base; estimated tax; deductible business costs |
| C2C through your LLC or S corporation | Your company invoices the client | Entity-level books; reasonable salary if an S corporation; owner payroll; more compliance |
A higher 1099 or C2C rate often looks better until you subtract the employer half of payroll tax, health insurance, retirement contributions, paid time off and unpaid gaps between contracts. Compare after-tax, after-benefit numbers, not hourly rates.
Classification and visa cautions
The IRS decides whether a worker is an employee by weighing behavioral control, financial control and the relationship of the parties. Relief provisions that protect a business that treated workers as contractors do not apply to technical service specialists, such as engineers, computer programmers and systems analysts, whom the business supplies to another business (Publication 15-A). If a vendor or client treats you as a contractor but directs your day-to-day work like an employee, both sides can face back taxes. See employee vs. independent contractor.
If you hold an H-1B or another employment-based visa, the visa generally ties you to a sponsoring employer. Check with an immigration attorney before earning 1099 or C2C income. See our page for H-1B and visa holders for tax residency issues.
S corporations and owner pay
Many IT consultants form an LLC and elect S corporation status once profit is steady. The owner must be paid reasonable wages for the work done, with payroll tax withheld, before taking distributions. Health insurance for a more-than-2-percent shareholder is generally reported in W-2 wages and then deducted. An S corporation adds payroll, state filings and a separate return, so it needs enough profit to justify those costs. See S corporation taxes, reasonable compensation and entity selection.
The 20 percent qualified business income deduction can apply, but consulting is one of the specified service categories, and whether your particular work counts depends on the facts. Thresholds before limits apply are $197,300 (single) and $394,600 (joint) for 2025, and $201,750 and $403,500 for 2026.
Travel, per diem and the tax home
Travel costs are deductible when you are away from your tax home overnight on business. An assignment expected to last more than a year is treated as indefinite, and costs at that location are not deductible (Topic 511). Consultants who bounce between client cities and have no regular home base can be treated as having no tax home, which makes travel costs and staffing-firm per diem taxable. Meals are generally limited to 50 percent when you deduct actual cost. Keep dates, locations and business purposes.
Software development costs
Starting in tax years beginning after 2024, domestic research and experimental costs, which generally include the cost of developing software, can be deducted when paid, or you can elect to amortize them over at least 60 months. Foreign research costs must still be amortized over 15 years, which matters if you or your company pay offshore developers. Small businesses with average gross receipts of $31 million or less had a limited window to apply the change to earlier years. Related credits are covered in the startup costs and research expenses guide and the research credit guide.
Equipment, home office and states
Laptops and equipment of $2,500 or less per invoice item can often be deducted at once, and larger items may qualify for Section 179 or bonus depreciation. A home office for a contractor must be used regularly and exclusively for business. Compensation is generally taxed where you physically perform the work. Illinois residents can claim a credit for tax paid to other states on Schedule CR, and nonresidents owe Illinois tax on Illinois-source income. If foreign clients withhold tax, a foreign tax credit may apply; see foreign tax credit for India income and multi-state tax.
How we can help
We review offers before you sign, set up S corporations and payroll, prepare multi-state returns and plan retirement contributions. See business formation, business tax preparation and equity planning. This page is general information, not advice for your situation.
Frequently asked questions
Is a C2C arrangement better than W-2?
Not automatically. It adds compliance and shifts payroll tax, benefits and gaps to you. Compare total after-tax income.
Can I deduct a laptop my employer does not reimburse?
If you are a W-2 employee, generally not on a federal return. A contractor can deduct business equipment.
Do I owe tax in a client's state?
If you perform work physically in that state, it may tax that income. Remote work from home in one state is treated differently, so check each state's rules.
Are staffing firm per diems tax free?
Only if paid under an accountable plan, you have a tax home, and the assignment is temporary.
Official sources
- IRS: Publication 15-A, Employer's Supplemental Tax Guide
- IRS: Topic no. 511, Business travel expenses
- IRS: Business tax provisions under the Working Families Tax Cuts
- IRS: Rev. Proc. 2025-32 (2026 inflation adjustments)
- IRS: Publication 334, Tax Guide for Small Business
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.