Taxes for Construction and Trades Contractors: A Practical Guide

The building boom across Parker County has been good for the trades, and the trades produce a particular kind of tax return. If you are a plumber, electrician, HVAC tech, framer, roofer, concrete contractor or remodeler running your own operation, these are the issues that come up every single year.

Are you a sub or an employee?

Many people in the trades move between W-2 work for a larger contractor and 1099 work as a sub, sometimes in the same year. Each arrangement is taxed differently, and the year you make the switch is the year to get advice early. We covered the first-year traps in W-2 vs. 1099: What New Contractors Get Wrong.

The people who work for you

If you pay helpers, you have to decide honestly whether they are employees or independent contractors. The IRS looks at control: who sets the hours, provides the tools, directs the work, and whether the helper has other customers. A crew member who shows up when you say, uses your tools, and works only for you is very likely an employee regardless of what you call him. Getting this wrong is expensive, because employment taxes and penalties fall on the business.

For genuine subcontractors, collect a W-9 before the first payment and issue 1099s in January. Payments to subs are deductible as contract labor either way, but the reporting has to match.

Materials, and the customer who supplies them

Materials you buy for a job are deductible. Whether they are an ordinary expense or cost of goods sold depends on how the business is set up, and for larger jobs there are inventory questions. Most small contractors run on the cash method and deduct materials as purchased, which works as long as the business is below the size where more complex accounting is required.

Texas sales tax on materials is its own issue: whether you charge tax to the customer depends on whether the job is new construction or a repair or remodel, and whether your contract is lump-sum or separated. This is a Comptroller matter separate from income tax, and it trips up more contractors than the federal return does. See Texas Sales Tax for Small Business Owners.

Tools and equipment

Hand tools and small items are deducted as supplies. Larger equipment — a trencher, a compressor, a trailer, a skid steer — is a capital asset that is depreciated or expensed under the provisions available that year. Expensing everything immediately feels good and is sometimes wrong, because a business with a loss cannot use it, and equipment sold later can produce recapture income. This is a decision, not a default.

The truck

A work truck used mostly for the business is one of the largest deductions available. A mileage log or actual-expense records are required either way. A truck also used for personal driving needs the business percentage documented. We wrote up the purchase decision in Buying a Vehicle for the Business.

Licenses, insurance, and everything else

State licensing fees, bonding, general liability insurance, workers' compensation, phone, software for estimating and invoicing, uniforms with a logo, safety equipment, continuing education, and vehicle registration are all ordinary business expenses. Fines and penalties are not.

Cash flow and quarterly taxes

A contractor who gets a large draw on a job and spends it on the next job's materials before setting aside tax money is the most common cash crisis we see. Quarterly estimated payments are the discipline that prevents it. Set the percentage, move it when the check clears, pay it on the schedule.

Records that hold up

Job-by-job tracking of income and direct costs is ideal, but at minimum: a business bank account everything runs through, receipts for materials and equipment, a mileage log, W-9s from every sub, and copies of every invoice. A bookkeeping system that captures those as you go turns tax season into a report. Our small business preparation and bookkeeping is set up for trades businesses, and we work with contractors throughout Weatherford, Azle, Springtown and the surrounding counties. Get in touch before the next job starts.

The habit that fixes most of it

Almost every tax problem a contractor brings us traces back to one thing: money from jobs going into the same account that pays for groceries. Open a separate account for the business, deposit every job payment into it, pay materials and subs out of it, and move a fixed percentage of each deposit into a savings account for taxes before you touch the rest. That single change makes the estimated payments possible, makes the 1099s you receive easy to reconcile, and makes the year-end conversation about equipment, a truck or an entity a planning conversation instead of a rescue.

Trades businesses in Weatherford, Springtown, Granbury and across the county are a large part of who we work with, and the ones who get ahead of it are rarely the ones with the biggest revenue. They are the ones with a separate account and a log in the truck.

This article is general information, not tax advice. Thresholds, forms and rules change from year to year, so confirm the details for your own situation before you file.

Running a trades business and behind on the tax side? Call RD Precision Tax Service in Weatherford at (817) 480-6649, or request a free estimate. Robert has prepared returns for clients across Weatherford, Parker County and the surrounding North Texas counties since 2017.