Construction

Construction income is earned over the life of a job, not when the invoice goes out. That makes accounting methods, job costing and subcontractor records matter more here than in most industries. Bonding companies and lenders also often ask for financial statements from a CPA firm.

How money moves through a construction job

The points where tax and accounting rules come into play are numbered.

Stage 1Bid and contractContract price, scope and completion date signed.
Stage 2Crew and subcontractorsEmployees on W-2 payroll; subcontractors on 1099-NEC.1
Stage 3Costs to the jobLabor, materials and equipment coded to each job.2
Stage 4Progress billingInvoices sent as the work reaches milestones.3
Stage 5RetainagePart of each invoice held until completion.
Stage 6Job closesFinal bill sent, retainage released, look-back figured.

Numbered points are explained below.

The three points, explained

At: Crew and subcontractors

Subcontractors and worker classification

Calling a worker a subcontractor does not make them one, and a wrong call leads to payroll tax questions. Whether a worker is an employee or an independent contractor depends on control and independence, not on what the contract calls them; payments to contractors are reported on Form 1099-NEC by January 31.

How we help

We review how your crews work and track contractor payments through the year so the 1099-NEC list is ready in January.

At: Costs to the job

Job costing and work in progress

Your bank and your bonding company read the business job by job. They look at gross profit by job and at over- and under-billings, which needs costs coded to jobs as they happen, not allocated at year-end.

How we help

We set up job costing in QuickBooks Online and code costs to jobs every month.

At: Progress billing

Long-term contract accounting

On a long job, the year you are taxed on the income can differ from the year you bill it. Income from long-term contracts is generally reported under the percentage-of-completion method; smaller contractors who meet a gross receipts test on jobs expected to finish within two years have an exception, and home construction contracts are exempt. Contractors using the percentage-of-completion method may also owe look-back interest, figured on Form 8697.

How we help

We check your contracts and receipts against the rules and apply the method that fits.

Services that apply

All services

Bookkeeping & Accounting
Job costing set up in QuickBooks Online, with costs coded to jobs every month.
Compilations & Reviews
Bonding companies and banks often require compiled or reviewed statements.
Tax Returns & Planning
The choice of accounting method for contracts changes when income is taxed.
Tax Representation
Worker classification and payroll tax notices are common in construction.

Questions

Still have a question?

Do I have to use the percentage-of-completion method?

Not always. Smaller contractors that meet the gross receipts test, on jobs expected to finish within two years, can use other methods. Home construction contracts are also exempt. We check your contracts and receipts against the rules.

How do I know if my crew are employees or contractors?

The IRS looks at behavioral control, financial control and the relationship as a whole. There is no single deciding factor. If it stays unclear, either side can ask the IRS for a determination on Form SS-8.