Self-employment in the construction industry offers many benefits, such as flexibility, picking projects that spark your passion, and the potential for higher earnings. However, it also brings challenges, particularly in managing taxes and keeping meticulous financial records. To help you bulldoze through these complexities and maximize your deductions, here are some essential tax tips tailored specifically for your construction company. For discussion purposes, we will use the term self-employed to describe sole proprietors, partners, and S-Corporation shareholders. Each have their pro and cons as discussed in a previous blog.
Nailing Down Your Estimated Taxes
Unlike salaried employees, who have taxes withheld from their paychecks, self-employed construction workers must pay estimated taxes quarterly. As a sole proprietor, partner, and S-Corporation shareholder, you are the foreman responsible for paying income and self-employment tax, which covers Medicare and Social Security contributions. If your tax liability exceeds $1,000, you must pay quarterly estimated taxes in April, June, September, and January. By staying aware of what you owe, the tax rate, and these deadlines, you can avoid penalties and ease the burden when taxes are due.
Laying the Foundation with Detailed Records
Do not wait until tax season to gather your documents and receipts. Accurate and thorough record-keeping is the cornerstone of your long-term success. Maintain records of all income, including bank statements, contract agreements, and invoices. Also, keep all business-related expenses such as insurance payments, receipts, and subcontractor payment records. Tools, such as QuickBooks or other accounting software, can be added to your toolkit to simplify this process, ensure a smoother tax filing, and prepare you for potential audits. By staying organized year-round, you can regularly review your finances and file necessary paperwork promptly.
Maximizing Deductions One Brick at a Time
Familiarize yourself with all available deductions to maximize your return when the time comes. One of the benefits of being a self-employed taxpayer is that you can deduct items W-2 employees cannot.
Business Expenses: Deductible expenses reduce your taxable income, lowering the amount of money you owe. Common deductions for construction professionals include cell phones, equipment, home offices, insurance, marketing, materials, supplies, tools, vehicle expenses, and work travel.
Depreciation: You can depreciate large equipment and vehicles over their useful life. The Section 179 deduction allows you to expense the whole cost of certain assets in the year they are purchased, up to a limit, rather than depreciating them over several years.
Subcontractor Payments: If you hire subcontractors, their payments are deductible. Be sure to issue Form 1099-NEC to any subcontractor you pay $600 or more.
Remember, the percentage of use for your business determines most deductions. Be sure to carefully track what portions of your use are for business versus personal to support claiming deductions.
Harnessing Tax Credit Advantages
Energy-Efficient Home Credit: If your work involves installing energy-efficient systems, such as solar panels or HVAC systems, you may qualify for residential energy credits.
Work Opportunity Tax Credit (WOTC): If you hire employees from certain target groups who face significant barriers to employment, you might be eligible for the WOTC.
Retirement Contributions: Contributing to a retirement plan can help secure your financial future and provide immediate tax benefits by reducing your taxable income. Some of the options for self-employed individuals include:
Simplified Employee Pension (SEP) IRA: Allows for contributions of up to 25 percent of your net earnings from self-employment.
Solo 401(k) / 401(k): Higher contribution limits than SEP IRAs and the potential for catch-up contributions if you are over 50 years old.
Laying the Groundwork with Separate Accounts
Separate your business and personal expenses to simplify tax season. Have an entirely different bank account for business expenses, including a separate credit card. Additionally, do not combine business and personal expenses, no matter how tempting. Finally, if you must use business funds for personal expenses, transfer the business funds to your personal account first and then remit the payment.
Experts in Construction Advisory Services
Managing your taxes as a self-employed construction professional can be daunting. With proper planning and record-keeping, you can reduce your tax liability and keep more of your hard-earned money.
As one of the Top 50 Construction Accounting Firms in the United States (Construction Executive 2021, 2022, & 2023), we build long-term, value-added relationships and provide solid solutions that help positively impact your construction business. With over 66 years of leadership, experience, and expertise, our talented team of CPAs and advisors fully understand the nuances of the construction industry and provide resources beyond the traditional audit, accounting, and tax services to construction businesses throughout the country, with revenues ranging from $5 million to $500 million.
Here to Help
Partner with us to unlock the full potential of your construction business and embark on a journey of sustainable growth and success. Contact us today to begin building a brighter future.
Comments