A recruiter places an IT consultant on a six-month engagement and writes up a 1099 contract because that's what the consultant asked for. Six months later, the consultant takes a similar role through the same recruiter's competitor, who pays them through their LLC instead. The competitor wins the next three placements. The first recruiter didn't lose on bill rate. They lost on contract type, because they didn't know what a Corp-to-Corp (C2C) arrangement was or when to offer one. C2C employment and contract types decide how your contractor gets paid, who carries the compliance risk, and whether your placement actually closes.
The Four Contract Types Recruiters Actually Use
Most contract placements in the U.S. fall into one of four arrangements. Each one shifts who employs the worker, who pays the payroll taxes, and who holds the misclassification risk.
A W-2 contractor is an employee of a company, a staffing firm, or an Employer of Record (EOR) partner, but the engagement is project-based instead of indefinite. The W-2 employer withholds income tax, pays the employer side of payroll tax, and usually covers workers' comp, unemployment, and sometimes benefits. Most healthcare, allied health, and clerical contract placements use this model.
A 1099 contractor is a self-employed individual who contracts directly with the end client or staffing firm. The contractor pays self-employment tax, carries their own insurance, and decides how the work gets done. The IRS reports this on Form 1099-NEC.
A C2C (Corp-to-Corp) contractor runs their work through an LLC or S-Corp. The contract is between two corporations, not between a person and a company. The contractor's corporation handles payroll, taxes, and benefits for the contractor. This arrangement is common in IT consulting and specialized professional services.
A contract-to-hire placement is structured as a fixed-term W-2 or 1099 engagement with an expected conversion to a permanent W-2 hire at the client at the end of the term.
C2C Employment Explained
Corp-to-Corp is the contract type most recruiters know least about, and it's the one that opens the most placements in IT, engineering, and senior consulting markets.
In a C2C engagement, your candidate isn't an individual job seeker. The candidate is a single-member LLC or S-Corp that the candidate owns. Your staffing agreement runs from your firm (or your back-office partner) to that LLC. The LLC then pays its owner as a W-2 employee of itself, files its own payroll taxes, and may even sponsor its own retirement plan. From the IRS's perspective, this is a business-to-business contract, not a hire.
Why candidates prefer it: an LLC pays taxes differently than a sole proprietor and lets the contractor write off business expenses against revenue. Skilled contractors with steady demand often save meaningfully by routing pay through their own entity.
Why end clients sometimes prefer it: contracting with another business carries lower misclassification risk than contracting with an individual as a 1099. The audit case for a B2B agreement with an incorporated contractor is cleaner than the audit case for a long-running 1099 with a single worker.
The catch for recruiters: not every candidate who says they want to be paid C2C actually has a real corporation. If the candidate's "LLC" is dormant, or really just a sole proprietorship with a DBA, the protection you assumed isn't real. Verify the entity exists and is in good standing before the contract goes out.
Where Each Contract Type Puts the Compliance Risk
Worker classification is the single biggest compliance trap in contract staffing. The IRS evaluates worker classification across three categories: behavioral control, financial control, and the nature of the relationship. Misclassifying a worker carries penalties that can reach 100% of the back taxes owed.
W-2 engagements move the classification question off the recruiter's plate almost entirely. The contractor is an employee of a real employer, and the employer pays the right side of every tax. If your back-office partner is an EOR, they take the classification analysis with them.
1099 engagements put the classification question squarely on whoever made the placement. If the IRS or a state labor agency decides the contractor looks more like a W-2 employee than an independent business, the agency that placed them and the end client both face exposure. The U.S. Department of Labor's independent contractor classification rule continues to evolve, so the misclassification risk on any 1099 engagement depends on the current test and the specific facts of the engagement.
C2C engagements reduce, but do not eliminate, the risk. A legitimate operating LLC with multiple clients, real overhead, and real business decisions stands up under scrutiny. A shell LLC that exists only to pay one worker on one engagement gets treated as a sham, and the contractor gets reclassified as an employee.
Choosing the Right Contract Type for Your Placement
The right contract type depends on the candidate, the client, and the duration of the engagement.
Use W-2 when the contractor works set hours, uses client-provided equipment, takes direction from a client supervisor, or runs longer than six months on a single assignment. W-2 is the default for healthcare, allied health, light industrial, and most clerical roles. It's also the safest option when you aren't sure.
Use 1099 for short, project-scoped engagements where the contractor genuinely controls the how and the when. Think a graphic designer delivering a logo, a marketing consultant running a 30-day audit, or a freelance copywriter on a single project. The shorter and more independent the work, the more defensible the 1099.
Use C2C when the candidate already operates as an LLC with multiple clients, when the engagement is in IT or professional services, and when the candidate's tax structure makes it worth the small extra administrative effort. The clean B2B agreement is worth the legitimacy verification.
Use contract-to-hire when the client wants a defined trial period before bringing someone on permanently. Make the conversion terms explicit in writing so the client doesn't quietly extend the contractor indefinitely.
If you place across all four, a deeper dive on the 1099 vs C2C distinction is worth keeping handy. The same goes for the misclassification risk side of 1099 placements.
The contract type decides who employs the worker, who pays the taxes, who carries the misclassification risk, and whether the placement holds up under audit. Picking the right one protects the recruiter, the client, and the candidate. Picking the wrong one creates exposure none of them signed up for.
If you want the W-2 path without building your own back office, FoxHire's Employer of Record platform handles compliance, payroll, workers' comp, and benefits across all 50 states, so you can place contractors without becoming an employer yourself. Book a demo to see how it works.
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FAQs
Find answers to common questions about our services and the contingent workforce management.
What does C2C employment mean in staffing?
A C2C (Corp-to-Corp) arrangement is a business-to-business contract between a staffing firm and a contractor's incorporated business, usually an LLC or S-Corp. The contractor's company is the employer for that contractor, and your firm pays the company, not the individual. C2C is most common in IT, engineering, and senior consulting placements.
Can a recruiter place a contractor as W-2 without becoming their employer?
Yes. The recruiter sources the candidate and owns the client relationship, while an Employer of Record (EOR) partner becomes the legal employer for payroll, tax, workers' comp, and benefits. That keeps the recruiter out of the employer-of-record role while letting the client get a W-2 contractor on the engagement.
What's the biggest difference between 1099 and C2C from a compliance standpoint?
With a 1099, the staffing firm or end client carries direct misclassification risk if the IRS or DOL decides the worker should have been a W-2 employee. With a C2C, the contract is between two corporations, so the contractor's own LLC is the employer for tax and classification purposes. The risk drops, as long as the LLC is a real operating business.
When does contract-to-hire make sense?
Contract-to-hire fits when a client wants to evaluate a candidate in the role before committing to a permanent hire. The candidate works as a contractor, almost always W-2 with an EOR, for a defined period, then converts to a direct employee of the client. Make conversion terms explicit so the contract doesn't quietly roll forward.
How do I know if a C2C contractor's LLC is legitimate?
Verify three things: the LLC is registered with the secretary of state in good standing, the LLC has been operating for more than a brief period, and the contractor isn't the sole client of that LLC. A sham LLC built only to route pay for one engagement gets treated as a 1099 (or worse, a W-2) if audited.
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