Successful construction projects are completed by teams of skilled contractors. Contractors, designers and suppliers with different skills work together to deliver a project to the building owner or homeowner that exceeds expectations. Professional contractors understand their specific trades and work to deliver their projects under budget and ahead of schedule. But they might struggle with certain aspects of the business behind the trade, including independent contractor taxes.
Are you an independent contractor?
Understanding the definition of an independent contractor is important. The IRS provides guidelines for determining if you are an independent contractor or an employee of a company.
Business owners might also use these guidelines to help correctly classify their employees and the independent contractors who support their business operations. They provide three key questions in determining the status of an individual:
- Behavioral: Does the company have the right to control or direct the individual’s actions or work?
- Financial: Are the financial aspects of the individual’s job controlled by the company, or is the individual responsible for his or her own finances?
- Type of relationship: Is there a written agreement or contract between the individual and the company? Are there benefits offered to the individual?
As the IRS states on its web page, Independent Contractor (Self-Employed) or Employee businesses or individuals must weigh all factors that are unique to their specific situation. It is best to consult your professional accountant and attorney when determining your status. They will help you make the right decisions regarding independent contractor taxes.
Working with key advisors
Are you interested in running a successful construction company? Of course you are! Whether you are leading a construction company with employees or you are the sole member of your company, you want to be successful.
The key to making good decisions is to have a strong group of key advisors who can give you advice about your company.
You will face decisions on an ongoing basis, including those relating to independent contractor taxes. That group of advisors can help you source out key information that can help you strategize accordingly.
Before you make a decision regarding independent contractor taxes, you should consult with your advisory team. You also should share your unique situation with your accountant and attorney to make sure you are basing your decision on the best possible information and insights.
How being an independent contractor affects your salary
Most people have had a job that provides a salary or paycheck on a regular basis. If you look at your paycheck, you will notice that there is a gross amount and a net amount of pay. The difference between these two numbers is the deductions that are taken out of the paycheck. Social Security, Medicare and income taxes are deducted from the gross amount of the paycheck, and you receive the net.
The employer pays some taxes on behalf of the employee, including matching Social Security and Medicare payments. When an individual becomes self-employed or an independent contractor, the IRS requires that the individual pay a self-employment tax.
The independent contractor is responsible for the portion of the Social Security and Medicare tax that the employer typically pays on behalf of the employee. This makes up a portion of the independent contractor taxes that an independent contractor might be subject to.
As a self-employed individual, you are also responsible for collecting and remitting your federal income taxes, as well as state and local income taxes, depending on where you live. As an employee, your income taxes would be withheld and remitted by your employer on your behalf. But as an independent contractor, that responsibility now falls on you.
The importance of accurate recordkeeping
Independent contractors are small business operators. In many situations, they might be the company’s only employee. But that does not diminish the importance of keeping accurate records.
Deductions are the permitted expenses you incur during the course of business that you may use to calculate your adjusted gross income. You are required to maintain accurate records for your expenses, including material purchases, equipment purchases, and rentals and labor expenses. Maintaining proper records can impact the amount of independent contractor taxes you owe.
Pro tip: It is recommended that you speak with your accountant regarding eligible deductions and for tax planning.
Independent contractor taxes and project bids
In order to be a successful construction contractor, you must be able to sell work and win bids. This requires you to be able to develop accurate construction cost estimates.
Contractors who bid too low win work, but are not able to cover the expenses on their projects. Contractors who bid too high will find it difficult to win work and maintain their business.
Successful contractors understand their businesses and the related operating expenses. They know their numbers and how those numbers impact their bids and estimates.
Independent contractor taxes are an important set of expenses that contractors should take into account when developing pricing for their projects. These are typically considered direct expenses for the projects they are working on, because they are generated as a result of activity on the project.
Don’t let taxes be the death of your business
Ben Franklin once said, “In this world nothing can be said to be certain, except death and taxes.” Taking his quote a step further, mishandling your taxes can quickly become the death of your contracting business.
Overlooking tax requirements can create liabilities for you and your business depending on the structure of your company. Every situation is unique. Make sure that you work with a licensed tax professional, accountant and attorney to develop a plan that meets your unique needs as an independent contractor.
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.