As a licensed contractor, you’ve got enough on your plate with high-pressure deadlines and constantly shifting targets to hit. The last thing you need is to be buried under a mountain of tax paperwork, trying to make heads or tails of any of it!

With so many moving parts and costs, it can feel impossible to navigate the complicated labyrinth that is the US and California tax codes.

With these simple tips, however, you can easily and quickly make sure you’re maximizing your tax savings.

How Do You Structure Your Business?

Before diving into tax requirements, it’s crucial to understand how your business structure influences your tax obligations.

You probably already know this information, but it’s important to restate it here so that we have a good starting point.

1. Sole Proprietorship: As a sole proprietor, you’ll report business income on your personal tax return. Keep track of expenses and income throughout the year so you can report them when tax day comes. Many, if not most contractors, are sole proprietors.
2. Partnership: Income and losses are passed through to individual partners. Partners report their share on personal tax returns. Rarely are contractors partnerships, but in cases where it is a family business, you may see it.
3. LLC: Limited liability companies offer flexibility, allowing owners to choose their tax classification (e.g., sole proprietorship, partnership, or corporation). The second-most common form of business structure for contractors.
4. Corporation: Let’s be honest, if you’re a big enough construction company that you need corporation status to maximize your tax benefits, you either already know how to best file your taxes, or you have an accountant who handles your voluminous balance sheet.

Choose a structure that best suits your business needs and tax goals. Most construction professionals, as previously mentioned, will find sole proprietorships to be more than enough to fulfill their tax needs and will find the most savings there. But the more you grow, the more you’ll need the protection of LLCs and partnerships or corporations.

Know Your Taxes: Federal, State, and Local

Federal Taxes

There’s no escaping Uncle Sam. Always pay your taxes in full – you do not want the IRS sniffing around your business, causing trouble, when you could just take care of it ahead of time by educating yourself and planning effectively.

• Income Tax: All businesses must file an annual income tax return. Tax rates and filing requirements depend on your business structure.
• Self-Employment Tax: Self-employed contractors who operate as sole proprietors have to pay self-employment tax, which covers Social Security and Medicare taxes.
• Estimated Tax: Again, if you are a sole proprietor (working as a 1099 employee), you may need to make quarterly estimated tax payments if you expect to owe tax of $1,000 or more when filing your return.
  • • You don’t have to make these payments, but they will lower your tax burden at the end of the year.

State Taxes

It’s no mistake – California has high taxes. Make sure you’re keeping enough cash on hand to pay when April comes around; or, if you’ve got the right tax plan, get ready to get a rebate.

Either way, you can prepare yourself to file your state taxes as a California contractor by checking out the Franchise Tax Board’s website.

• State Income Tax: If you’re doing business in California, you have to pay an income tax. You can find how much you expect to pay based on your revenue. Here is the Franchise Tax Board’s tax bracket.
• Sales Tax: California has a sales tax, so you’ll be paying tax on things like materials and payments to any subcontractors or yourself.
• Employment Taxes: If you have employees, you may need to withhold state income tax and pay state unemployment tax.

Local Taxes

Local tax requirements depend on where in California you’re operating. These local taxes can come in many forms, like business licenses or filing fees. Be prepared to pay local taxes when starting a new construction.

Employment Taxes: A Responsibility You Can’t Ignore

If you have employees, you must withhold and pay employment taxes. These include:

• Federal Income Tax Withholding: Based on the employee’s Form W-4 and their earnings. This will fluctuate based on the number and types of employees you have. You are exempt from paying taxes for contract workers who file Form 1099.
• Social Security and Medicare Taxes: Employers and employees share responsibility for Social Security and Medicare taxes.
• Federal Unemployment (FUTA) Tax: Every employer must pay FUTA tax, which provides unemployment compensation to workers who lose their jobs.
• State Unemployment Tax: You must also pay into California’s unemployment fund if you have full-time employees. This will also be a variable cost for your business as you grow.

Tax Deductions: Your Best Friend

If you’re a contractor, you probably can save tons of money by taking advantage of various tax deductions that are favorable to construction professionals – people who are constantly spending money on their business in order to survive.

We recommend researching these common deductions for a full scoop, but hiring a tax pro who has the expertise to successfully navigate the various deductions you qualify for is even better.

Common Deductions for Contractors

• Home Office Deduction: If you use part of your home exclusively for business purposes, you may qualify for the home office deduction.
• Vehicle Expenses: Deduct business-related vehicle expenses such as mileage, fuel, maintenance, and insurance.
• Tools and Equipment: Contractors can often deduct the cost of tools, equipment, and supplies used in the course of business.
• Contract Labor: Payments made to subcontractors are generally tax-deductible if they meet specific criteria.
• Insurance: Business insurance premiums, such as general liability or workers’ compensation, can be deductible.
• Training and Education: Expenses related to improving your professional skills may be tax-deductible.
• Advertising and Marketing: You can deduct advertising expenses, including website development, business cards, and online advertising.

Hire an Accountant For Your Contracting Business

As we have said multiple times in this article: Hire. An. Accountant.

If you’re doing business in California as a contractor, we can’t recommend hiring an accountant. Simply put, an accountant will save you tons of time, energy, and money when it comes to filing your taxes – as well as being more likely to keep you from being audited.

The reality is that American taxes can be extremely confusing, so employing the skill of a professional accountant can help big time when it comes to saving the most money (and saving you the energy of having to understand the un-understandable).

You can even hire an accountant who specializes in California contracting taxes – saving you more money than ever before.

Taxes Can Actually Save You Money

Everyone has to pay taxes (well, mostly everyone). But by understanding and executing an effective tax plan for your contracting business, you can actually find yourself with more money in your pocket come tax time next year.

One thing we definitely can’t emphasize enough as you continue to grow your contracting business – hiring a qualified accountant or tax professional service is a critical element of maximizing your tax deductions and saving money every year.