Tax obligations as construction contractors
After four years of helping construction contractors prepare their payrolls and tax returns in Florida, Sherly Ramirez is still surprised by how many don’t fully understand their tax obligations as construction contractors. Some neglect to include price in the cost of the taxes they pay when preparing bids, while others seem to think tax deadlines are mere recommendations.
As you might expect, this can result in profits being way lower than expected, or tax penalties, or both.
For instance, she had a client who registered a new limited liability company, or LLC, in May 2017. Between January and May 2018, he had to file the company’s annual report and the company’s tax return was due no later than March of that same year. If he needed more time, he could have asked the Internal Revenue Service (IRS) to extend his tax deadline until October.
But he failed to request an extension for his and waited until October to file his return. Two weeks later, he client received a letter from the IRS stating that he owed interests and penalties. Because the client owned the LLC with a partner, he ended up having to pay penalties and taxes for two people.
“If he had checked with his tax preparer or his accountant, he would have avoided the amount he now owes to the IRS simply by requesting an extension,” said Ramirez, who owns Orlando, Florida-based SR Accountant Services. “Even though they had reported the company’s profits and losses in their personal 1040 Forms, they weren’t aware that failure to file the company’s informative tax returns would cause them to owe that liability.”
Consequences for job costing and profits
The financial consequences of overseeing the tax obligations as construction contractors, of course, extend well beyond penalties and interest paid to the IRS or other tax authorities. After all, if a business does not accurately estimate its taxes, it can’t know its true overhead costs. If it doesn’t know its overhead costs, it can’t know how much profit is making, or indeed, whether it’s making a profit.
Federal, state and local taxes are no less expensive to a roofer than the costs of materials, crew wages, worker’s compensation and other costs. To make a profit, a contractor must set a price higher than the sum of all the expenses incurred to complete the job or project.
Here are the primary tax obligations as construction contractors to consider
- Federal Income Taxes – These are usually the biggest tax expense incurred by a construction company. Whether you make a profit and owe taxes or report a loss, you still must file a return with the IRS
- Federal Payroll Tax – The federal tax withheld from each employee’s pay check that employers must transferred to the IRS as soon as it is withheld.
- Self-Employment Tax – Self-employed people paying $1,000 or more in self-employment taxes during the year are expected to pay these taxes on a quarterly basis. For additional information, please read this article.
- State Income Taxes – In 2018, 41 out of the 50 states of the Union collected an Income Tax. You can check the list here.
- Sales Taxes – Sales Taxes are collected on a state or local basis in 46 states, according to this 2018 Ranking of the Average Sales Tax by State from USA Today. The ranking shows the average sales taxes per state – a mix of the average state sales taxes and local sales taxes for each of the states – which ranges from 2.9 to 7.25 per cent. For the states that have state sales taxes, these are reported monthly and paid to the state directly.
Tax Deadlines Are Not Suggestions
Regardless of how many tax authorities you are dealing with, you can be sure all of them strictly enforce deadlines. In other words, no tax is less important than other, and having more than one tax obligation doesn’t mean you can miss filings or payment of other taxes.
In terms of taxes, it’s paramount to understand what the deadlines are, especially when the company or business has just recently started operations.