Tax planning is an essential process for construction business owners—it’s equally as important as other priorities like job costing, scheduling work, and running payroll.
But taxes can also feel daunting for non-experts, which means they often get relegated to the backburner until tax deadlines inspire a sense of urgency.
Unfortunately, this dawdling and reactive approach to taxes only does construction businesses a disservice. Haphazard tax planning leads to mistakes—and those oversights can be costly in both time and money.
Let’s take a look at four of the most common tax planning mistakes in the construction industry, along with some advice to avoid them.
1. Neglecting paperwork and documentation
“One of the first steps in tax planning is knowing your numbers,” explains Amanda Adams, CPA, who has worked closely with construction clients. “Without accurate financials, you are guessing where you think your tax liability will end up.”
Keeping adequate records and diligent documentation is important for every type of business, but it’s especially true in the construction industry when shifts—things like change orders, rising material costs, supply chain disruptions—are so frequent and can have such a big impact on your bottom line.
As basic as it sounds, keeping thorough and organized evidence of your revenue and expenses is one of the best steps you can take to invest in tax planning.
2. Using a business entity that’s not the right fit
Sole proprietorship—which means there’s no legal distinction between you and your business—might be the most common business structure in the United States, but that doesn’t mean it’s the default right choice for your construction business.
Various business entities accomplish different things. “Some, like an LLC, are there to limit exposure should you get sued,” says Adams. “While others allow you tax saving strategies.”
An S corporation (frequently abbreviated as an S-corp) is one business structure that offers tax benefits. It’s referred to as a “pass-through entity” and allows business owners to avoid double taxation by reporting pass-through income on their personal tax returns.
That doesn’t mean that an S-corp is the automatic right choice for construction businesses either, though. Adams mentions that there isn’t one business entity that’s inherently better than others—it depends on your revenue and expenses.
Talking with an accountant will help you determine which business entity is the best fit for your business and maybe even benefit from some tax savings.
3. Misclassifying workers
Labor has been a hot topic in construction for a while. A recent report from Billd states that 40% of construction professionals point to the availability of skilled construction workers as the biggest risk to construction businesses. It ranks ahead of other pressing issues like material prices and volatility, material lead time delays, and a competitive bidding environment.
But when it comes to tax planning, construction business owners can’t just focus on finding workers—they also need to focus on classifying them correctly.
Unfortunately, misclassifying workers is fairly common, with an estimated 10% to 30% of employers incorrectly labeling employees as independent contractors when they’re actually employees. The oversight (whether intentional or accidental) is particularly prevalent in construction, where using independent contractors helps businesses avoid costly benefits and high workers’ compensation premiums.
“While many in the construction industry use contract laborers, misclassifying an employee as a contract laborer can have huge tax implications and penalties for the entity,” Adams explains.
When it comes to tax planning, construction professionals need to have a strong grasp on what separates an independent contractor from an employee and respond accordingly. The Department of Labor explains that an independent contractor must:
- Run their own business
- Be paid upon completion of project
- Provide their own materials, tools, and equipment
- Work with multiple clients
- Maintain a temporary relationship until the project is completed
- Decide when and how they will perform the work
- Decide what work they will do
If a worker doesn’t check all of those boxes, it’s likely that they’re not an independent contractor. Continuing to classify them that way could mean you’re liable for employment taxes and potentially other hefty fines come tax time.
4. Saving all of the hard work for tax time
The operative word in tax planning is planning—it’s something that you should do proactively, and not just when tax deadlines sneak up and light a fire under you.
“One of the biggest takeaways all taxpayers can get is that they need to be active in their tax planning and preparation process,” Adams says. A few ways to take a more ardent approach include:
- Finding the right accountant: The construction industry can require more specific accounting expertise with change orders, deposits, tax credits, and other nuanced factors. Look for an accounting professional who has some familiarity with the construction industry and can provide more tailored advice.
- Engaging your accountant year-round: Adams shares that filing a return is one thing. But for businesses that truly want to implement tax saving strategies, they’re better served by engaging a tax professional throughout the year—and not just at tax time.
- Marking down the tax deadlines: As a business owner, you need to pay quarterly estimated taxes. Mark those due dates in your calendar at the start of each year so that upcoming tax deadlines don’t slip your mind. It’s a simple yet effective tax planning tip.
- Using the right tools: If your tax prep involves sorting through endless spreadsheets, there’s a better way. Only 55% of construction companies use project accounting software, but software like QuickBooks is a game-changer when you need to quickly and easily pull the information your accountant needs. If you’re already using Knowify, QuickBooks integrates seamlessly.
Committing to these steps early and often will simplify tax planning and ultimately make tax time way less stressful.
Proactive tax planning can translate to cost savings
Tax planning likely isn’t your idea of a good time as a construction business owner, but it’s still well worth investing the time, energy, and resources.
Taking a proactive approach to your taxes not only saves you stress, but it can also save you money. And when 71% of construction professionals say that they want to grow their businesses, those tax savings translate to money they can invest right back into their operations.
The QuickBooks and Knowify integration can help you manage job costs, build invoices and estimates, and create custom reports with accurate insights that help you grow. Seamlessly sync clients, vendors, items, expenses, and payments between the two so you can manage your construction business and your accounting in one place. Get started today.
Kat Boogaard
Kat Boogaard is a Wisconsin-based freelance writer focused on business ownership, leadership, and the world of work. When she escapes her computer, you’ll find her spending time with her two boys and her two old, crabby rescue mutts.