Contractor Accounting 101: Learn all About 1099 Accounting and Bookkeeping (including top services)

What is accounting for contractors?

As independent contractors, it’s important for us to properly track our income and expenses.

That’s where accounting for contractors comes in.

This can include using accounting software to keep track of income, expenses, and taxes; setting up a system to organize and store receipts, and creating budgets to ensure financial stability.

It can also involve keeping track of any subcontractors that we hire and making sure their invoices are paid on time and properly recorded in our accounts.

Accounting for contractors may not be the most glamorous aspect of running our businesses, but it’s essential for ensuring long-term success.

Plus, having organized financial records makes tax season much less stressful!

Why is accounting important for contractors?

As an independent contractor, managing your finances is crucial for success.

Without the benefit of a dedicated accounting department, it’s up to you to keep track of income, expenses, and profits.

Accurate records not only help ensure that you receive proper payment for your work, but they can also serve as important proof in case of an IRS audit.

Fortunately, there are various accounting software options available that make it easier than ever to track this information.

In addition to managing receivable accounts, these programs can also help track accounts payable for any materials or equipment purchased for a job.

As a contractor, staying on top of your accounting is essential for both financial and legal reasons.

It may take some effort to establish and maintain a system, but it’s well worth the effort in the long run.

7 accounting basics for contractors you need to know about

For all independent contractors, it is important to keep a handle on your finances.

Here are seven accounting basics you need to know about:

Getting reliable accounting software

As independent contractors, it’s crucial to have reliable accounting software to track our expenses and income.

Without this tool, we may overlook important deductions or miss out on receivable accounts. 

By accurately tracking our expenses and income, we can ensure that our business is financially secure and make informed decisions about future investments and financial planning.

In addition, having accurate records makes the dreaded tax season much less stressful as we can easily create reports and categorize expenses.

Choosing the right accounting software requires careful research and consideration of the features that best serve our individual needs, but the benefits are well worth the investment.

Don’t let something as important as financial management fall by the wayside – invest in reliable accounting software today.

Keep tabs on your accounts receivable

Not only will this help prevent mistakes and lost payments, but it can also provide valuable insight into the financial health of your business.

This becomes even more crucial if you work with independent contractors or freelance employees, as they may not send invoices promptly or at all.

By staying on top of your accounts receivable, you can ensure timely billing and payment for the services provided by yourself and your independent contractors.

In addition, regularly reviewing them can reveal patterns in late payments that may require action from collections or a change in payment policies.

Don’t let unpaid invoices pile up – stay vigilant for a healthier financial future for your business.

Set aside money for taxes throughout the year

As independent contractors, it is our responsibility to ensure that we are setting aside money for taxes throughout the year.

As we receive our receivable accounts, it’s important to remember that a portion of these funds should go toward covering our taxes.

By creating and sticking to a budget that includes setting aside a percentage of the income statement for taxes, we can avoid being blindsided by large tax bills at the end of the year and maintain financial health.

In addition to saving and setting aside money, independent contractors should also make sure to pay estimated taxes every quarter to avoid penalties. Taking these steps can help us stay on top of our tax responsibilities as independent contractors.

Record all expenses related to your business

For a small business owner or independent contractor, it is essential to accurately track and record all expenses related to your work.

This includes everything from supplies and equipment to receivable accounts and payments made to subcontractors.

Keeping meticulous records not only allows you to have a clear understanding of your financial health but also helps ensure that you pay the correct amount in taxes.

When in doubt, err on the side of caution and record any expense that may be related to your business, even if it seems minimal at the time.

Doing so can save headaches and stress during tax season and help prevent any potential penalties or issues with the IRS.

Plus, having all expenses recorded allows for easier budgeting and planning for future expenditures.

Don’t let sloppy record-keeping impact the success of your business – make sure to document all related expenses as they occur.

Separate personal and business expenses

As a small business owner or independent contractor, it’s important to separate your business and personal expenses by using a business credit card or designated bank account for purchases related to your work.

Separating them from your expenses may seem like extra work at first, but it can pay off in the long run.

Not only will it make filing taxes easier, but it also allows you to see where your money is going and track profit and loss more accurately.

Keeping separate accounts for business and personal expenses can also help with receivables, as clients and customers are more likely to take you seriously if they can see clear records of your financial health.

So don’t neglect those receipts – take the time to separate business and personal expenses for a better handle on your finances.

Stay organized

One important step in achieving this organization is to have a system for keeping track of receipts and other important documents.

This can range from a physical filing system to digitally organizing receipts through a program like Quickbooks.

Keeping records of expenses also helps when it comes time to pay taxes, as it allows for deductions to be easily recorded.

Don’t let disorganization get in the way of financial success – implement a system for keeping track of your documents today.

Seek advice from a financial professional

From accounts receivable to setting aside funds to pay taxes, it can be overwhelming to keep track of it all on your own.

That’s why seeking advice from a financial professional is a smart move for ensuring the health of your business.

They can help you create a budget and establish financial goals, as well as teach you key skills for managing your money.

It may seem like an added expense at first, but the long-term benefits far outweigh the cost.

Don’t hesitate to seek out a trusted financial advisor and take control of your financial success.

The better you understand and manage your finances, the more successful you can be as a contractor.

How to start with accounting for contractors?

One of the first steps to getting organized is setting up an independent contractor’s accounting system.

This involves keeping track of accounts payable, as well as expenses related to your business.

When setting up accounts, make sure to separate business and personal expenses to ensure clear record-keeping.

Another important aspect of independent contractor accounting is properly filing taxes and keeping track of any applicable tax deductions.

While it may feel overwhelming at first, implementing an efficient accounting system can save time and stress in the long run.

Accounting for contractors: DIY or outsource

Should you try managing your finances and accounting yourself, or outsource to a professional?

While it may be tempting to try and save some money by handling all of your accounting on your own, consider the potential risks.

Are you familiar with all of the necessary accounting principles and income tax laws?

Missing important deductions, or not properly reporting income, could result in costly penalties down the line.

However, working with an accountant does come at a cost. It’s important to weigh the potential savings from DIY against the peace of mind that comes with leaving your financial management in the hands of a knowledgeable and experienced professional.

Ultimately, the decision about whether to handle accounting for your independent contracting business yourself or outsource to a professional is up to you – just make sure to thoroughly assess both options before making a decision.

Top services for contractors

As an independent contractor, it’s important to have reliable services to handle your financial needs.

There are several services to consider.

A service with generally accepted accounting principles (GAAP)

One of the most important services for a business is maintaining its financial records according to (GAAP).

This helps business owners and administrators understand their cash flow, track expenses, and make informed decisions about investments and growth.

It’s especially crucial for small businesses, which often have limited resources to keep up with complex financial regulations.

And for industries like construction, where projects can span multiple years and involve numerous contracts and subcontractors, GAAP reinforces accountability and transparency throughout the entire process.

Whether it’s setting up a business bank account or managing construction accounting, having proper GAAP documentation ensures success in both daily operations and long-term planning.

This ensures that your business records are organized and in compliance with regulations.

A service that specializes in income tax

When it comes to income tax, having a dedicated service can offer numerous benefits.

For independent contractors and small businesses, it means no longer having to keep track of multiple bank accounts or manually calculate deductions.

A specialized service will handle all of that for you, saving valuable time and energy.

And not only will they take care of filing your taxes correctly and on time, but they can also offer advice on how to best maximize your deductions and minimize your tax burden.

So don’t let managing income tax be a source of stress – outsourcing to a professional service can make the process much smoother and more efficient.

Project management software

It helps to streamline the organization and execution of your tasks, from assigning resources to monitoring progress and deadlines.

This tool can come in particularly handy for construction companies, who often work on multiple projects at once and need a clear way to keep everything in order.

Project management software can also improve communication among team members, making it easy for everyone to stay up-to-date on the latest developments.

So don’t waste any more time trying to juggle everything yourself – let project management software do the heavy lifting for you.

Reliable liability insurance provider

As an independent contractor or construction company, there is always the risk of property damage or personal injury.

Liability insurance helps to protect against these potential risks by providing coverage for legal expenses and compensatory damages.

Having a reliable liability insurance provider can give you peace of mind, knowing that you have a line of defense in the event of an accident or mistake on the job.

In addition, some clients may require proof of liability insurance before starting a project, making it crucial to have coverage in place.

Protecting yourself and your business with reliable liability insurance is not only wise, but it can also be necessary to secure new opportunities.

Don’t let a lack of coverage put your livelihood at risk – make sure to choose a dependable provider for your liability insurance needs.

Well-designed website

For small businesses in every industry, having a well-designed website is crucial.

It serves as the first impression for potential clients or customers and can make or break their decision to work with you.

In the world of independent contracting and construction companies, where trust and credibility are so important, a website with sloppy design and outdated content can easily turn away potential clients.

A website allows potential clients to easily access information about your services, pricing, work portfolio, and contact information, while also showcasing your professionalism and credibility.

Additionally, having a well-designed website increases your visibility on search engines, making it easier for customers to find you.

In today’s digital age, having a strong online presence is crucial for the success of any business, and investing in a quality website design is an essential step in achieving that presence.

Legal counsel

Having a legal counsel is important for any business, especially in industries like construction where contracts and negotiations are an everyday occurrence.

A lawyer can provide an unbiased opinion and advice on the best course of action in any situation, whether it be drafting a contract or resolving a dispute.

And when dealing with independent contractors and subcontractors, a legal counsel can ensure that your company is meeting all compliance regulations and protecting your interests.

Having a reliable legal resource can save time and money in the long run, preventing potential legal issues from arising in the future.

It’s always better to have the support and guidance of a qualified lawyer rather than trying to navigate complex legal matters on your own.

The peace of mind alone is worth the investment in hiring a legal counsel for your construction company.

Marketing support

As an independent contractor in the construction industry, having marketing support is crucial for building a successful business.

Without proper marketing tactics, it can be difficult to stand out amongst the competition and attract new clients.

Additionally, having a marketing plan in place helps to establish a cohesive brand image and communicate the unique value that your business offers to potential customers.

On top of that, having a highly skilled marketing team on your side can save you valuable time and energy that can be better spent on your actual construction work instead of trying to handle all of your marketing needs as a one-person operation.

Ultimately, investing in marketing support will increase your visibility and opportunities for growth within the competitive construction industry.

By taking the time to research and select the best options for your independent contracting business, you can set yourself up for success now and in the future.

Top 6 construction accounting errors

It can be easy to make mistakes in construction accounting, but it’s important to catch and correct these errors before they impact your financial statements. Here are six common errors to watch out for: 

Failing to properly classify employees as independent contractors

Misclassifying employees as independent contractors can have serious consequences for businesses.

Not only do they miss out on the benefits and protections afforded to employees, but they also may be missing out on important tax deductions.

Additionally, failing to properly classify workers can result in harsh penalties from the IRS, including fines and back taxes owed.

Beyond just financial considerations, misclassification can prevent workers from receiving proper compensation for their work and leaves them vulnerable to exploitation by employers.

Business owners should carefully consider the nature of the work being performed and the degree of control they have over it before assigning a classification to their workers. It’s not worth risking financial and legal trouble down the line.

Neglecting to charge or collect sales tax

As a small business owner, it can be tempting to skip the hassle of charging and collecting sales tax.

After all, it’s just one of many fees and expenses that need to be addressed, and as an independent contractor, you may be unfamiliar with the requirements.

However, failure to charge and collect sales tax on products or services can have serious financial consequences.

Not only are you responsible for any unpaid taxes, but neglecting this important aspect of your business may also raise red flags in your financial statements and lead to an audit by the state government.

Taking the time to understand and comply with sales tax laws will benefit both you and your customers in the long run.

So before making a sale, remember to add that extra charge for sales tax – it could save you from future complications.

Mixing business and personal expenses on the same account

This ultimately can lead to a mess when tax season rolls around.

Not only will it be difficult to prepare financial statements, but it may also result in underpaying taxes or even an audit.

One way to avoid this issue is by keeping separate business bank accounts and accounts for personal expenses.

This not only makes it easier to track expenses for bookkeeping purposes, but it also helps ensure that all applicable sales tax is paid.

Mixing business and personal expenses may seem convenient at the moment, but in the long run, it can lead to unnecessary stress and potential financial consequences. Keep your finances organized by separating business and personal expenses from the start.

Miscalculating overhead costs and job estimates

Failure to do this can result in lost profits or even financial troubles down the road.

One way to prevent miscalculations is to stay organized with your expenses, making sure to keep track of every purchase and documenting how it relates to your business. Make sure to also include any necessary expenses such as sales tax in your calculations, as these can easily be overlooked when estimating a job.

Regularly examining your financial statements can also help catch any miscalculations before they become a problem.

Overall, staying organized and mindful of expenses can ultimately save time, stress, and money in the long run.

Failing to track change orders

Neglecting to keep track of change orders can lead to discrepancies between your budget and the actual expenses incurred.

It can also create confusion and misunderstandings with your contractors, as they may not be aware of additional expenses that were agreed upon.

Staying organized and consistently tracking change orders helps ensure the smooth running of any project and avoids unnecessary conflicts.

It is an important aspect of responsible financial management for any business.

Insufficient cash flow management

Failing to properly monitor and manage income and expenses can quickly lead to financial trouble.

One important aspect of cash flow management is setting up separate business bank accounts and credit cards.

This allows for easy tracking of business expenses and income, as well as provides a clear separation between personal and professional finances. It’s also crucial to create a budget and closely monitor spending.

Regularly review profit and loss statements to ensure that expenses aren’t exceeding income, and adjust spending accordingly.

By taking these steps, independent contractors can prevent issues with insufficient cash flow management in their businesses.

Finding and correcting these errors will help ensure the success of your construction business and improve overall financial health.

Construction Accounting Concepts

When it comes to construction accounting, there are a few important concepts to keep in mind.

First, it is important to distinguish between employees and independent contractors.

Employee expenses and taxes must be handled differently than those of independent contractors.

Additionally, keeping business and personal expenses separate is crucial. This means setting up separate bank accounts for the construction business and being diligent about recording all income and expenses accurately.

Finally, understanding the difference between capital assets and operating expenses can help with overall financial planning and forecasting for the construction company.

By keeping these key concepts in mind, construction businesses can stay on top of their finances and set themselves up for success.

Contract retention

A contract retention strategy helps to guarantee that you have all the necessary paperwork for financial and legal protection.

This includes a signed contract outlining the terms of the relationship and ensuring that the contractor has their own separate business bank account.

Job costing

This involves accurately recording the expenses and profits associated with individual projects or jobs.

In addition, make sure to save receipts for any job-related purchases, as these can be used for accurate record-keeping and potential tax deductions.

Construction payroll

One option is to hire employees and handle payroll internally, using software or a third-party provider.

Alternatively, many construction businesses choose to work with independent contractors who are responsible for their taxes and benefits.

However, it is important to ensure that any independent contractors are properly classified according to federal guidelines.

Contract revenue recognition

When it comes to recognizing revenue in contracts, the role of an independent contractor is important to consider.

With the completed contract method (CCM), contractors recognize all revenue, expenses, and profits only when the project is completed.

For example, if a small business hires an independent contractor to complete a project, the payment for that project should not be recorded as revenue until the contractor has finished their work and been paid.

On the other hand, if a small business sells a product or service to a customer, the payment can be recognized as revenue immediately upon receipt in the business’s bank accounts.

Contractors pricing

As an independent contractor, it can be difficult to know how to price your services accurately.

Construction accounting is not always straightforward, and there are numerous factors to consider such as materials, labor, overhead expenses, and even market demand.

Many independent contractors rely on intuition or rough estimates when determining their rates, but this approach often leads to underpricing and lost profit.

On the other hand, overpricing can discourage potential clients from hiring you.

A solution to this problem is incorporating construction accounting into your pricing strategy.

This method involves analyzing costs, industry trends, and competitor rates to come up with a fair and profitable price for your work.

By taking the time to carefully calculate your prices, you can attract clients while still earning a profit for yourself.

As a contractor, it’s important to focus not only on the quality of your work but also on ensuring that you’re fairly compensated for it.

Construction accounting can be a valuable tool in achieving this goal.