Handling payroll for a construction company involves more than just calculating hours and wages; it requires meticulous attention to detail to ensure compliance with labor laws and proper record-keeping.
The complexity with small business accounting in the construction sector can be overwhelming from accurately tracking employee data and hours worked to processing deductions like taxes, insurance, and retirement contributions according to industry-specific regulations and union agreements.
That’s why using payroll software with features designed for the construction industry, such as ConstructionPayroll.com, is essential. Working with software dedicated to the industry simplifies the process and keeps you up-to-date on your jobs so that you are under budget and on time.
While streamlined payroll software is helpful, you need a grasp of foundational tax knowledge to manage construction payroll effectively. If you’re a new construction business owner, here’s a look at essential payroll information
Choose the Right Business Structure
If you’re the owner of a new business or are preparing to open a construction business, it’s vital that you know what different business structures are and how they function. Let’s briefly cover the most common business structures.
Sole Proprietorship
This is the simplest structure, but you and your business are considered one entity. All profits and losses flow through your personal tax return (Schedule C).
LLC (Limited Liability Company)
LLCs are most likely what you think of when the term “business structure” arises. LLCs offer personal liability protection while profits and losses flow through your personal tax return (Schedule C) unless you elect S corp status.
Partnership
Partnerships mean multiple owners share profits and losses based on a partnership agreement. Each partner reports their share on their personal tax return (Form 1040).
S Corporations
S corporations offer limited liability protection and help owners avoid double taxation (corporate taxes and taxes on dividends). If your company is an S corporation, you must file a separate tax return (Form 1120S).
C Corporations
This type of corporation offers limited liability protection but faces double taxation. It is best suited for larger companies with significant growth potential.
Understanding W-9s and 1099s
A W-9 and a 1099 form serve different purposes in the U.S. tax system, particularly when it comes to taxes for construction companies..
The W-9 form, formally known as the “Request for Taxpayer Identification Number and Certification,” is provided by an independent contractor or freelancer to a company or individual that pays them for services. It contains the contractor’s Social Security Number (SSN) or Employer Identification Number (EIN), which the company uses for reporting purposes.
On the other hand, the company issues a 1099 form, specifically the 1099-NEC (Non-Employee Compensation), to the contractor at the end of the year, summarizing the total amount paid for their services. The contractor then uses this form to report income on their tax return.
Let’s boil that information into one simple statement when looking at taxes for construction companies. The W-9 is used to gather information, while the 1099 is used to report payments made.
Fiscal Year vs. Calendar Year
The fiscal and calendar years are two different ways of structuring a 12-month accounting period for construction company payroll.
The calendar year follows the standard January 1st to December 31st timeline, which aligns with the traditional year. In contrast, a fiscal year can start and end on any date a business or organization chooses, allowing flexibility to align financial reporting with the company’s operational cycle.
For example, the government’s fiscal year runs from October 1st to September 30th. While both periods span 12 months, choosing between a fiscal or a calendar year often depends on what best suits the organization’s financial and operational needs.
Understanding Cash vs. Accrual Accounting Methods
Cash and accrual accounting are two fundamental methods of construction company payroll that record financial transactions, each with distinct approaches to recognizing revenue and expenses.
In cash accounting, transactions are recorded only when cash is received or paid out. This method provides a straightforward view of a business’s cash flow but might not fully capture the financial health of the business at a given time.
On the other hand, the accrual accounting method records income and expenses when they are earned or incurred, regardless of when the cash actually changes hands. This approach is more complicated but gives a more accurate picture of a company’s financial position by matching revenue with related expenses within the same period. This is a great approach for businesses with complex financial transactions or long-term contracts.
Construction-Specific Accounting Methods (Not Recommended for Cash Basis)
Construction-based accounting methods are designed to accurately reflect the financial performance of long-term projects, where standard revenue recognition might not be appropriate.
Two primary methods often used in construction accounting are the Percentage of Completion and the Completed Contract Method.
The Percentage of Completion method recognizes revenue and profit progressively throughout the duration of a project. It does so by estimating the percentage of the project that has been completed by the end of an accounting period, allowing companies to report income in relation to the work accomplished rather than waiting for the entire project to be finalized.
Large-scale projects that span multiple accounting periods use this approach as it provides a more accurate and timely reflection of the company’s financial position.
On the other hand, the Completed Contract Method is more conservative, recognizing all revenue and profit only when the entire project is finished. This approach delays income reporting until the project is complete, which can be beneficial in situations where project outcomes are uncertain or when the company prefers to defer tax liabilities until the project is fully delivered.
Key Takeaways to Process Construction Payroll Effectively
Choosing the right business structure, fiscal year, and accounting method can significantly impact your tax burden.
There are alternative accounting methods beyond cash that better reflect the unique income streams of construction businesses.
How ConstructionPayroll.com Streamlines Your Payroll Processing
While this guide equips you with foundational tax knowledge, managing payroll for your construction company can feel overwhelming. That’s where ConstructionPayroll.com steps in.
Designed specifically for construction businesses, our software tackles the complexities you dread when payroll comes around.
We understand that multi-state workforces are a real issue. That’s why our software manages employee payroll across different states and automatically calculates taxes based on location.
We generate certified payroll reports required by some unions and government contracts. No more guesswork on filling out the WH-347, our software does it automatically!
Speaking of complex, job tracking can be a beast when multiple team members and positions fill up a single job site. Our software tracks labor costs associated with specific jobs for accurate project budgeting and profitability analysis.
Time Tracking Integration and More!
ConstructionPayroll.com offers a comprehensive solution for construction businesses. It seamlessly integrates with popular time-tracking apps to eliminate manual data entry and ensure accurate payroll calculations.
Our platform handles diverse pay structures for salaried, hourly, and overtime workers, accommodating multiple pay rates. By automating federal, state, and local tax calculations. ConstructionPayroll.com eliminates the burden of manual tax processing and helps businesses stay compliant with ever-changing regulations.
We are truly the all-in-one system that streamlines payroll operations, saving time and reducing errors for construction companies of all sizes.
Focus on Building, Not on Paperwork
At ConstructionPayroll.com, we simplify payroll management, so you can focus on what matters most—building high-quality homes, buildings, roofs, pools, roads, and more.
Our platform automates the tedious tasks that often bog down your day, allowing you to run your business more efficiently. With a user-friendly interface and dedicated customer support, managing construction payroll is now easier than ever, even if you don’t have an accounting background.
Ready to streamline your operations? Let ConstructionPayroll.com handle the details while you build your success. Get a quote today!