This blog post was updated in December 2021
Ideally, tax time shouldn’t be a particularly stressful time for construction companies. Taking some time to get organized before it’s time to file will make the season run much more smoothly. The Construction Services team at Corrigan Krause compiled the list below to help construction business owners to start getting prepared for tax season.
What is your business structure?
This might sound like a very basic question, but it’s an extremely important one. How your business is structured directly impacts how your business is taxed and what kind of deductions you’re eligible for. When it comes to construction companies, the most common entity selections are as follows:
- Sole proprietorship
- Limited liability company (LLC)
- S Corporation
Make sure you’re registered with the IRS as the appropriate structure. If you do not register with the IRS as a certain structure, by default, the IRS will treat your company as a sole proprietorship.
What taxes do construction companies need to pay?
Construction companies need to pay a number of different taxes, depending on their structure and their location. Generally, construction companies are responsible for self-employment/FICA, federal income, state and local taxes (SALT).
Federal Insurance Contributions Act (FICA)
Federal Insurance Contributions Act (FICA) are the taxes that help fund Social Security and Medicare. If you are a business owner with employees, these taxes are your responsibility. As the employer, you split FICA taxes with your employees by withholding half the amount due from your employees’ paychecks. Payroll tax reports are due to the IRS on a quarterly basis so the IRS can reconcile the amounts deducted from employee paychecks and amounts due from employers.
Self-employment tax is similar to the FICA tax outline above, but is specifically for self-employed individuals who do not have employees. You are considered to be self-employed by the IRS is you are a freelancer, independent contractor or own a business classified as a sole proprietorship or partnership.
All taxpayers, including sole proprietors and partnerships, must pay income tax.
State and local taxes
Depending on your location, your state and/or local municipality may require you to pay taxes. Check with your state’s department of taxation and with your local government to get an idea of what tax responsibilities you have.
What taxes apply to subcontractors?
The use of subcontractors is extremely common in the construction industry. It’s vital that when your business is working with a subcontractor, a subcontractor agreement is in place. This agreement will clearly outline the services the subcontractor will be completing, including if they’ll be utilizing your equipment and facilities or providing their own. A subcontractor should not do any work outside the scope of the agreement. If the IRS audits your company and finds your subcontractors are working essentially as employees, you could be penalized for not filing the correct taxes.
For example, if you’re a sole proprietor and subsequently filed self-employment taxes, but the IRS determined your subcontractor is actually operating as an employee, you will be penalized for not paying the necessary FICA taxes for your “employee”.
Are there tax deductions for construction companies?
There are a number of deductions available for construction companies and contractors. The list of deductions below is not exhaustive and eligibility depends on your unique situation, but it includes the most common deductions construction companies take:
- Car and truck expenses
- Contract labor
- Depreciation of assets
- Mortgage or rent (for home office or business spaces)
- Legal and professional services
- Office expenses
- Vehicle, machinery, and equipment
- Repairs and maintenance
- Taxes and licenses
Documentation is key when considering taking any deduction. Make sure you’re able to prove your eligibility so you’re prepared should an audit occur.
Corrigan Krause Specializes in Construction Accounting
Corrigan Krause has an entire team dedicated to the construction industry – not just during tax season. From general contractors to specialized trades workers to residential homebuilders, our specialized team can identify ways to help meet your goals and objectives to achieve growth and profitability. With labor shortages and ever-changing regulations, contractors are faced with a variety of industry challenges. The Corrigan Krause Construction Services Group provides solutions and strategies that can help you take advantage of tax saving opportunities, maximize your bonding capacity, and manage your working capital.