Tax and Accounting Help for Construction and Contractors

Construction businesses pay tax in ways that differ from many other small companies. Projects last months, customers hold back retainage, subcontractors come and go, equipment is expensive and payroll swings with the season. This page covers the tax and accounting issues general contractors, subcontractors, remodelers and tradespeople face in Naperville, Aurora and across Chicagoland, and for contractors who work with us remotely.

Employees or subcontractors

The IRS weighs three groups of facts: behavioral control, financial control and the relationship of the parties. A subcontractor who sets his own hours, brings his own tools, bids for jobs, carries his own insurance and works for other customers looks more independent. A worker who takes daily direction, uses your equipment and works only for you looks like an employee, whatever the paperwork says (Publication 15-A). Employers with a reasonable basis for treating workers as contractors may get relief, and a business may ask the IRS to decide with Form SS-8, but the relief does not cover every case. State agencies that handle unemployment insurance and workers' compensation apply their own tests. See employee vs. independent contractor.

Before you pay a subcontractor, collect a Form W-9, a certificate of insurance, and a license where required. File Form 1099-NEC by January 31 for qualifying payments. See contractors and Form 1099-NEC.

Accounting methods and job costing

Small contractors often use the cash method, which counts income when received. The 2025 gross receipts limit for small business accounting methods is $31 million, and it is $32 million for 2026 (Rev. Proc. 2025-32). Long-term contracts, meaning those not finished in the year they start, may require the percentage-of-completion method under section 460 of the tax code, unless an exception for small contractors or home construction applies. The details of the exceptions depend on receipts and contract length, so confirm before you pick a method.

Whatever the method, keep job-level records:

• Revenue, change orders and billings by job.
• Materials, labor, subcontractors and equipment costs by job.
• Retainage receivable and payable.
• A work-in-progress schedule showing over- and under-billing.

Bonding companies and banks often require CPA-prepared statements, so good job cost reports support growth. See accounting and financial statements and cash vs. accrual accounting.

A cash-method contractor who is never paid on an invoice cannot deduct it as a bad debt, because the amount was never included in income (Publication 334). Collect deposits, use written contracts, and ask your attorney about lien rights.

Equipment, vehicles and tools

Property acquired after January 19, 2025 can qualify for 100 percent bonus depreciation, and Section 179 allows up to $2,500,000 for 2025 ($2,560,000 for 2026) (IRS business tax summary). Vehicles over 6,000 pounds get different treatment from cars, and the Section 179 cap for SUVs is $31,300 for 2025, so check the weight rating and body type before you buy. Keep a mileage log: trips from home to a regular workplace are commuting, while trips between job sites generally are not. Small tools and equipment costing $2,500 or less per invoice item can often be deducted at once under the de minimis safe harbor. General liability and workers' compensation premiums are deductible business expenses.

Payroll, overtime and public jobs

Payroll drives most contractors' cost, so classify every worker correctly, make federal deposits on time and file quarterly returns. Public projects can require prevailing wage rates and certified payroll reporting. Union contributions and fringe benefits need careful coding. Employees may deduct the premium portion of overtime pay (up to $12,500, $25,000 joint) for 2025 through 2028, so payroll records should identify it; see new deductions for tips, overtime and seniors. If crews travel, a per diem can be tax free only if paid under an accountable plan. Unpaid payroll taxes are a common reason a contractor ends up with personal liability; see payroll services.

Owner pay and the QBI deduction

Contractors generally are not in the specified service category, so the 20 percent qualified business income deduction can apply even at higher income, although above the thresholds ($197,300 single and $394,600 joint for 2025; $201,750 and $403,500 for 2026) the deduction is limited by the wages the business pays and its qualified property. S corporation owners should pay themselves reasonable wages. See QBI deduction.

Cash jobs, deposits and sales tax

Contractors who are paid in cash or checks cashed at the store must run those receipts through the books. Receiving more than $10,000 in cash in one transaction or related transactions requires Form 8300 within 15 days. If you build and sell spec homes or flip properties, the profit is generally ordinary business income, not capital gain. Whether you collect or pay sales tax on materials depends on the type of contract and Illinois rules, so confirm with the Illinois Department of Revenue guidance for your work.

Common mistakes

• Paying workers in cash without payroll.
• Missing certificates of insurance, which can leave you liable for an uninsured sub.
• Mixing personal and job spending.
• Failing to bill change orders and retainage.
• Using one bank account for everything.

How we can help

We set up job costing, prepare returns for contractors and their owners, run payroll and produce financial statements for bonding and banks. See bookkeeping, working capital and bank loans and business tax preparation. This page is general information, not advice for your situation.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.