Must-Know Tax Tips for Construction Business Owners

The information contained in this article should not be relied upon as legal, business, or tax advice. We encourage you to seek guidance from your legal counsel, business or tax specialist with regard to how the information contained in this article may or may not apply specifically to your business.

“I love doing taxes!” said no construction pro ever. But as a business owner, if you don’t handle taxes properly, you could at best be paying the IRS too much. At worst, you could be putting your entire business and even your personal assets at risk. Here we’ll cover a few important tax tips for construction business owners, followed by some financial management best practices to keep your business in the clear.

Want to learn even more about finances for construction pros? Watch this Houzz Pro webinar.

Tax Tips

1. Understand Payroll Taxes vs. Income Taxes

Taxes are taxes, right? After all, they all end up at the IRS. But Paul Tilyaev, a CPA with expertise in the construction industry and the founder of Perpetual CPA, says it’s important to understand the difference — and many new small business owners don’t. 

Payroll taxes are funds that a business deducts from employees’ paychecks on behalf of the IRS and holds in trust. And when payments are not transmitted to the IRS on time, “they start treating it almost immediately like a criminal offense,” Tilyaev says. “It’s not just like being late on income taxes. It’s almost like fraud to them.” He adds that if and when you get a letter from the IRS about delinquent taxes, don’t ignore it. “There’s a timer on it, usually about 30 days,” he says. Consult a tax expert right away to avoid the IRS’ wrath — and potentially hefty penalty fees.

Having employees on payroll also means you’ll have to file at least four forms with the government, and three are tax-related. Not filing any of the following can have financial and other consequences.

• Form 941: For filing payroll tax returns quarterly.
• Form 940: For filing federal unemployment insurance tax returns annually.
• W2: You must issue this statement of earnings and amounts withheld to employees at the end of every year, so they can file their own taxes.

Form I-9: Not a tax form. This is for the DOJ and asserts a worker’s immigration status and right to work in the U.S.

2. Don’t Miss Any Deductions

You probably already know that certain expenses related to construction businesses can be written off, meaning deducted from taxable income. And lower taxable income means a lower tax bill. But you might not be aware of the wide range of deductible expenses.

In general, the expenses have to be “necessary and ordinary” — meaning essential to running your daily business. A few commonly known ones are safety gear and uniforms, large tools and heavy machinery, and electronics, such as computers. Less commonly known write-offs include:

• Subcontractor labor
• Interest on business loans
• Certain taxes, such as state sales taxes and employment taxes — including your own self-employment taxes
• Advertising and marketing costs
• Union dues
• Legal fees
• Business software, such as Houzz Pro

3. Choose the Right Legal Entity

A sole proprietorship is the easiest type of legal entity for small businesses, as you don’t need to register with any government agency unless your business name is different from your legal given name (for instance, Joe’s Quality Construction versus just Joe Jones). However, with this type you could be personally liable for any payments in the event of a lawsuit. It also might not be the best setup for tax purposes.

For example, if your business is set up as an S-corporation, which is a type of limited liability corporation (LLC), you must pay yourself a reasonable salary and pay taxes on that salary through payroll like everyone else. But “reasonable amount” doesn’t necessarily mean the entire amount your business earns, resulting in tax savings. Tilyaev says that in general, the threshold for when becoming an S-corp is worthwhile starts at about $100,000 in annual earnings. 

The other types of LLCs are partnerships and C-corps. Consult a tax pro for more info and to find out which is right for you.

Financial Best Practices

Tax time isn’t the only time to make sure your financial foundation is sound, of course. These best practices will help keep your business doors open even in a downturn.

1. Manage Cash Flow Wisely

Tilyaev notes that 82% of businesses fail because of poor cash flow management. And “one of the biggest errors a lot of new business owners make is wasting their working capital, their liquidity, on things that are not necessarily important in the beginning,” he says. Analyze your projects to determine what elements are needed for repeatable business, as opposed to one-off needs — for example, equipment and staff — and focus on procuring those things.

Don’t expand too quickly either, because expansion eats up cash. In the beginning, it’s more important to focus on setting up stable systems and practices, and getting a funding source set up even if you don’t yet need to tap it. “That’s when you can get the best terms,” Tilyaev says. He advises seeking funding from larger banks, which offer a range of products (loans, credit cards, lines of credit).

Tip: Decline a bank’s credit card when offered, Tilyaev advises, then wait for the bank to offer an incentive, such as cash or free travel miles. Plus, travel miles on business credit cards can be used for personal travel — and you don’t need to declare them to the IRS!

2. Set a Budget and Stick to It

If you don’t know exactly what your operating expenses and costs are, you’re setting yourself up for trouble. For instance, if you’re unknowingly operating at the maximum extent of your working capital, your business will be in dire straits if any unexpected expenses arise. 

Remember also that sales don’t always mean money in your pocket right away. For bigger or longer projects, you’ll want to at least set up milestone billing. And to get paid faster for any project, use Houzz Pro’s invoicing and payments feature. Clients can store their credit card info and pay invoices online, so you won’t have to wait for any checks “in the mail.” Houzz Pro also has QuickBooks integration, making accounting easier than ever.

3. Hire a Payroll Processor

Payroll can be more than a pain. If you’re the business owner and you’re handling it on your own, the IRS can come after you personally if you drop the ball on filing forms or remitting tax funds. Tilyaev says that even for small businesses, paying a payroll processor is worth it. “Yes, you’re going to pay $20 or $40 a month more,” he says, “but it will save you so many headaches.” An independent processor will file some of the forms and provide access to others, so you won’t have to really do anything except make sure you have enough money in your payroll bank account.

You might never come to love doing taxes. But with these tips and best practices under your belt, along with software designed for construction pros and expert support, you can feel confident that you’re paying only what you need to and protecting your business to boot.