Because many construction workers are classified as independent contractors, they are seen as self-employed professionals by the IRS, leaving them with more of a tax burden and a potential benefit from working with a tax professional.
Construction contractors are naturally quite busy on their projects and often don’t have the time or expertise to devote to tax preparation and planning. As a trusted advisor, a tax professional can advise them on some easy-to-digest tax tips and help them save vital tax dollars.
The following deductions are claimed on Schedule C (Form 1040) and can help these contractors lower their tax burden and keep more money:
Transportation expenses. When you’re deducting transportation costs, you can’t deduct the commute between your home and the jobsite. You can, however, deduct trips between multiple jobsites, as well as those made for business-related trips throughout the day, such as traveling to get supplies or attending meetings offsite.
You can claim the actual expense incurred or use the standard mileage rate prescribed by the IRS, which is 54 cents for 2016 and 53.5 cents for 2017. Air, bus, or train fare related to work can be written off, as well.
Advertising. You can deduct any materials you use to market your business, including flyers, branded promotional items, and the cost of hiring someone to design and make them for you. Advertising doesn’t apply to items such as business gifts, holiday party fare, or anything that isn’t branded.
Business insurance. The cost of insurance premiums related to running your business is entirely deductible, such as general liability insurance and property insurance.
Contract labor. If you made payments to any subcontractors who have worked with you on a job, those payments are deductible. You’ll need to distinguish between independent contractors and employees. Employees have their own deduction, which is listed in the “Wages” section below.
Health insurance deduction. You can deduct the cost of your personal health insurance premiums as a self-employed person, as long as you meet certain criteria:
- Your business is claiming a profit.
- You were not eligible to enroll in an employer’s health plan (including your spouse’s plan).
Legal/professional services. Professional fees incurred by attorneys, tax preparers, accountants, or other professionals can be deducted. If the fee is paid to an employee, the expense would be included under “Wages.”
Meals for travel and entertainment. A deduction for meal expenses can be taken in the context of business travel or for entertaining a client. In either case, you can deduct up to 50 percent of the meal expense, which includes sales tax and gratuity. For the meal to be deductible, it must be consumed with at least one client, and the meeting must include business either directly before, during, or after the meal is consumed.
Self-Employed Contributions Act (SECA) deduction. Where traditional employees have their FICA taxes split between themselves and their employers, self-employed professionals are responsible for paying their own share of those Social Security and Medicare contributions, which are known as SECA.
Supplies and equipment. Any costs for normal, replaceable supplies that you use in the course of your work can be deducted. This can include items such as cleaning supplies, but not materials used as part of actual construction. Equipment, such as saws and hammers, can also be written off if it is solely used for business purposes.
Taxes/licenses. Business taxes, or your share of FICA if you have employees, can be deducted. The various licensing fees you pay can also be deducted.
Wages. Employees’ wages can also be deducted. This includes any salaries, commissions, or bonuses. This does not apply to any employee benefits you provide to your employees, which can be deducted separately on another line. It also does not apply to any salary you pay yourself.
You can encourage these construction contractors to stay organized, record their income and expenses, and retain receipts year-round. Stay in touch with them to ensure they are following through with their tax and accounting obligations.
Mike D'Avolio is senior tax analyst with the Intuit Professional Tax Group, he has been a small business tax expert for more than 20 years and serves as the primary liaison with the IRS for tax law interpretation matters, manages all technical tax information, and...