Bookkeeping for Independent Contractors: Everything You Need to Know

We are a subcontractor and the GC we are working for is asking us to sign and notarize progress payment line waivers for amounts they have not paid us for, is this legal? They are 60 days behind on our payment yet they are refusing to give us… Construction accounting, like all accounting, has to follow the processes and procedures accepted by the accounting and business industries.

• We advise on better financial recordkeeping, suggests ways to improve payroll management, and even help you identify opportunities for growth.
• Unlike other industries where work is done at a fixed location, businesses in the construction industry have to manage the accounting of operations that are constantly on-the-go.
• Without knowing which receivables a company is likely to actually receive, a company must make estimates and reflect their best guess as part of the balance sheet.
• You should also add your income and expenses from each project into a general ledger to get an accurate overview of your gross and net income.
• Businesses have different bookkeeping needs which vary based on industry, company size, federal and state regulations, as well as a number of other factors.
• With a proper dispute resolution clause in place, contractors, subs, and suppliers can avoid taking their disputes into litigation.
• If you do not have the documentation, you cannot back up your costs if there is an audit.

While the IRS doesn’t require businesses have a bank account, the IRS does require that you report every bit of your income. One wrong entry in your books can stay with you all year and surprise you at tax time. Contractors who work on public projects commonly have to navigate prevailing wage payroll, often called “Davis-Bacon payroll” after the https://www.world-today-news.com/accountants-tips-for-effective-cash-flow-management-in-the-construction-industry/ landmark Davis-Bacon Act. Prevailing wage legislation requires contractors to pay the rate of compensation that’s standard, or “prevails,” for each worker classification on similar jobs in the area. Contractors must then certify their compliance on each project using certified payroll reports that may vary between different states or agencies.

Construction accounting is customized to the industry

You can do it by hand, on a computer, or through the help of a third-party service provider. Regardless of how you do it, your focus should be on finding a way to do it right. Doing it right means keeping the books for your business up to date no matter what. Your books should be accurate and in compliance with IRS requirements. In comparison to other industries, like retail or manufacturing, construction contracting has several distinct traits from an accounting perspective.

With construction companies, production generally occurs on project sites rather than in a single fixed location. Workers and equipment move from site to site, so firms must be able to account for the costs of travel and moving and installing equipment. Unlike companies in other industries, such as retail or manufacturing, construction accounting typically focuses on custom projects, each of which must be managed for profitability. The Completed Contract Method allows for the recognition of revenues, expenses, and taxes once a project is complete.

Accounting Guide for Construction Contractors

Marjorie sits on Intuit’s VIP Program, is a frequent contributor to Inuit Accountants News Central, and has developed Intuit’s QuickBooks Enterprise Certification training. She has also been published in The Wall Street Journal, Forbes, BusinessWeek, American Express Open, the Huffington Post, and Inc. Many new independent contractors will start out doing bookkeeping themselves. Cash can be tight early on, so being responsible for your books can help you save some money while starting your business. Independent contractors need to be thinking of bank account reconciliation.

Revenue recognition or income recognition is how a contractor determines when they’ve officially made money on a project. It also helps determine when they should officially record an expense. Remember, this comes into play because construction contracts are usually long-term and often have delayed payments.

Fluctuating Overhead Costs

While you can prepare adjusting journal entries yourself if you’re comfortable doing so, we recommend working with an accountant or CPA to make sure your books are accurate and complete. If you’ve chosen the accrual accounting method, your journal entries should reflect all revenues earned and expenses you’ve been billed for during that period. For one thing, accounting will take less of your time, especially since many accounting solutions offer automated expense categorization and other time-saving features.

If a business’ sales exceed that amount, they’ll have to use another method for tax purposes. In that case, they may decide simply to use another method for their own books as well. By tagging every transaction with information from the job cost structure, contractors are able to see a whole new dimension to their costs. They can look at how much each aspect of operations costs on a particular job and across the company as a whole.

Beginner’s Bookkeeping

While cash accounting is the simpler of the two methods, accrual can give you a more accurate picture of your monthly revenue and expenses. This can be beneficial for construction firms since there’s often a 30 to 90-day delay between invoicing and payment. With cash basis accounting, the $10,000 is recorded whenever the customer pays construction bookkeeping their invoice. Your books won’t show any income from the work you’ve done until the customer pays. Having a way to keep track of expenses and profit in each category is crucial. A work in progress report analyzes the progress on active projects by recognizing revenue as a percentage of the costs that have been accrued to date.

It comprises key information that is required to procure the right goods, services, or works. This refers to the paperwork and documentation involved in every stage of the procurement process flow, all of which are collected and stored for reference and auditing reasons. These are stakeholders and their specific responsibility in the procurement cycle. They take care of initiating or authorizing every stage of the process. The number of stakeholders involved is directly proportional to the risk and value of the purchase.

Differences Between an Independent Contractor and an Employee

Another challenge those in the industry face is how to handle construction accounting basics when so much of your operation is constantly moving. Equipment and personnel move from site to site to complete a variety of jobs. When both the labor and production take place in a single location, travel time, insurance, and other related expenses aren’t a consideration.

• Often that requires specialized software to track and create those billings.
• If you do not file your profit and expenses, you are putting yourself at risk of being audited by the IRS.
• For many smaller businesses, cash basis accounting is an appealing choice.
• It’s crucial for construction bookkeeping to forecast financials because you’re often dealing with large value contracts and relatively low margins compared to other industries.
• Some of it is likely reserved for things like payroll, covering expenses, and paying taxes.