Tax Planning for Contractors and Trades Business Owners
Running a contracting or trades business is very different from earning a paycheck as an employee. Whether you own an HVAC company, plumbing business, electrical company, landscaping company, construction business, or another skilled trade, you're responsible for much more than completing the work.
You're also managing employees or subcontractors, equipment, vehicles, cash flow, taxes, and the financial side of a growing company. As the business becomes more successful, tax planning becomes increasingly important.
Your Tax Needs Change as the Business Grows
Many trades businesses start small. You may begin working by yourself, add a truck, hire your first employee, and eventually build a team. The tax and financial decisions you face at each stage are different. A business earning $100,000 doesn't necessarily need the same strategy as a company producing $1 million or more in revenue. Periodic Tax Strategy & Planning can help make sure your approach changes as the company grows.
Make Sure Your Business Structure Still Makes Sense
The structure you chose when starting the business may have been perfectly reasonable at the time. As profits increase, however, it can be worth reviewing.
Your business structure can affect how income is taxed, how you pay yourself, and what tax filings are required. For some owners, an S corporation election may eventually make sense. For others, the additional requirements may not justify the potential benefit. Our article LLC vs. S Corporation: When Is It Time to Make the Switch? discusses some of the factors to consider as a business becomes more profitable.
Know What Your Business Is Actually Making
Revenue tells only part of the story. A contractor can have a very busy year and still end up with disappointing profits after accounting for labor, materials, vehicles, insurance, equipment, and other expenses. That's why accurate Bookkeeping & Accounting becomes increasingly important as the company grows.
Good financial records help you understand what the business is actually earning and give you better information when making decisions about hiring, purchasing equipment, expanding, or taking money out of the business. They also provide the foundation for good tax planning.
Plan for Taxes Throughout the Year
One of the challenges of owning a trades business is that income can change quickly.
A strong year can produce a much larger tax liability than the year before. If estimated payments and tax savings don't increase along with profits, the owner may end up with a large tax bill even though the business had a successful year. Our article How Much Should Small Business Owners Set Aside for Taxes? explains why business owners should plan for tax obligations throughout the year instead of waiting until filing season.
Think About Equipment and Vehicle Purchases Before Year-End
Vehicles, tools, machinery, and equipment can represent significant expenses for contractors and trades businesses. Those purchases may also have tax consequences.
That doesn't mean you should buy a new truck or piece of equipment simply because someone tells you it's a "write-off." The business need should come first. When a significant purchase already makes sense, discussing it with your tax professional before completing the transaction can help you understand how the purchase fits into your overall tax plan.
Growing a Team Adds Complexity
Hiring your first employee or expanding from a few workers to a larger team is an important milestone. It also changes the financial side of the business. Payroll, workers' compensation, benefits, subcontractors, and other labor costs can become some of your largest expenses.
As the company grows, having reliable financial records and professional guidance becomes more important. Decisions that were manageable when you worked alone can have much larger consequences when you're responsible for an entire team.
Tax Preparation Shouldn't Be the First Time You Review the Year
Business Tax Preparation is necessary, but by the time your return is being prepared, the year is already over. That's why growing business owners should think about taxes before filing season. A year-end review can help you understand how the business performed, whether estimated payments are on track, and whether there are decisions that should be made before December 31.
Our Year-End Tax Planning Checklist for Business Owners covers several areas worth reviewing before the year closes.
How Groundwork Tax & Accounting Can Help
At Groundwork Tax & Accounting, we work with contractors and trades business owners who want to better understand the financial side of their companies. We help business owners keep accurate records, prepare their taxes, plan ahead, and adjust their tax strategy as the company grows. As your business becomes more successful, your accounting and tax needs should grow with it.
Related Services
Tax Strategy & Planning
Business Tax Preparation
Bookkeeping & Accounting
Frequently Asked Questions
When should a contractor start tax planning?
Tax planning can be valuable at any stage, but it becomes increasingly important as business profits grow, employees are added, and the owner's financial situation becomes more complex.
Does my business structure affect how much tax I pay?
Yes. Business structure can affect how income is taxed, how owners are compensated, and which tax filings are required.
Why is bookkeeping important for contractors?
Accurate bookkeeping helps you understand profitability, track expenses, prepare accurate tax returns, and make better business decisions.
Should I buy equipment before year-end for the tax deduction?
Only if the purchase makes sense for the business. Tax benefits can be considered when deciding when to make a necessary purchase, but they shouldn't be the reason for buying something you don't need.
How often should I review my taxes?
At minimum, a year-end review can be helpful. Businesses with rapidly changing income or significant growth may benefit from reviewing their tax situation more frequently.
