Because lots of construction workers are classified as independent contractors, they are seen as self-employed professionals and don’t have taxes withheld from their paychecks like traditional employees. This means they can claim business-related expenses as tax deductions, have more of a tax preparation burden and have the potential need to see a tax professional.
These construction contractors are naturally quite busy on their projects and don’t have the time or expertise to devote to tax preparation and planning. As a trusted advisor, a tax professional can advise them on some easy-to-digest tax topics, and help them save vital tax dollars and improve their cash flow. The following deductions are claimed on Schedule C and can help these contractors lower their tax burden and keep more money. They are written for the contractor, so pass the tips on to your clients by email, post them on your website or distribute through social media.
New Deduction for Self-Employed Workers and Small Business Owners
Under the Tax Cuts and Jobs Act, there is a new 20 percent deduction on business income for small business owners who report their operations on Form 1040, such as sole proprietors who use Schedule C. Income from partnerships, S corporations and limited liability companies is also included. This is a windfall for small business owners because $20,000 of $100,000 of business income would not be taxed! There are some calculations and limitations surrounding this deduction, including a phase-out of the deduction for high-income earners – over $160,700 for single filers, $321,400 for joint filers, and $160,725 for married, filing jointly.
When you’re deducting transportation costs, you can’t deduct the commute between your home and the jobsite. You can, however, deduct trips between multiple job sites, as well as those made for business-related trips throughout the day, such as traveling to get supplies or attending meetings offsite.
You also have to choose between two methods of tax deduction: the actual expenses method or the standard mileage method. The standard mileage rate for 2019 is 58 cents per mile. This figure is meant to reflect each of the following expenses: gasoline, lease payments, insurance, maintenance and repairs, vehicle registration, and depreciation. On the other hand, the actual cost method entails deducting each and every business-related car expense by itself. This includes gasoline, insurance, maintenance, depreciation and lease payments. Claiming actual costs requires solid recordkeeping and keeping receipts. You can do this manually with pen and paper, or automatically track and categorize expenses using, for example, QuickBooks® Self-Employed. Some expenses, such as gas and maintenance, are relatively easy to track as long as you hold on to your receipts. Other actual costs, such as depreciation, are more complicated.
Parking and Tolls
If your business meetings or supply runs require you to pay for parking or a toll, those expenses can be claimed as tax deductions. For example, if your local hardware store doesn’t validate parking while you’re picking up supplies, you can deduct that parking expense. You can also deduct tolls on roads and bridges. Be aware, however, that if you’re taking a break for lunch, you cannot expense the parking because it is not business related.
If you use municipal bus or rail to get around, then those expenses are also deductible. But, just as with car-based deductions, you cannot claim either leg of your commute to, or from, home.
You can deduct any materials you use to market your business. This includes not only flyers and branded promotional items, but also the cost of hiring someone to design and make them for you. Just remember that “advertising” doesn’t apply to things such as business gifts, holiday party fare or anything that isn’t branded.
The cost of insurance premiums related to running your business is entirely deductible. This can include contractor general liability insurance, property insurance and others. This doesn’t, however, include your personal health, auto or disability insurance.
If you made payments to any subcontractors who have worked with you on a job, those payments are deductible. Note that those contractors, unless they’re employees, will be seen as “independent contractors” for tax purposes. Employees have their own deduction, which is listed in the “Wages” section below.
Health Insurance Deduction (Form 1040, Schedule 1, Line 29)
You can deduct the costs of your personal health insurance premiums as a self-employed person, as long as you meet certain criteria:
- Your business is claiming a profit. If your business claims a loss for the tax year, you can’t claim this deduction.
- You were not eligible to enroll in an employer’s health plan. This also includes your spouse’s plan. If you were eligible to enroll in one and chose not to, you cannot claim this deduction.
- You can only claim premiums paid for the months when you were not eligible for an employer’s health plan.
Professional fees incurred by attorneys, tax preparers, accountants or other professionals can be deducted. This deduction does not apply, however, to any employees that perform these services for you. They should be included under “Wages.”
Deduction for Meals
Meal deductions can be taken either within the context of business travel or if provided to a current or potential business customer. You can deduct up to 50 percent of the meal expense as long as the food or beverages are not considered lavish or extravagant. For business meals, the meeting must include business either directly before, during or after the meal is consumed.
Self-Employed Contributions Act (SECA) Tax Deduction (Form 1040, Schedule 1, Line 27)
Whereas traditional employees have their FICA taxes split between themselves and their employers, self-employed professionals are responsible for paying their own share of those Social Security and Medicare contributions, which are known as SECA. Self-employed workers can claim a SECA deduction on Line 27 of Form 1040, Schedule 1. This amount is computed as part of Schedule SE.
Supplies and Equipment
Any costs for normal replaceable supplies that you use in the course of your work can be deducted. For construction workers and contractors, this can include things such as cleaning supplies, but not the materials used as part of actual construction. Equipment can also be written off if it is solely used for business purposes. This can include saws and hammers.
Business taxes, or your share of FICA if you have employees, can be deducted. Perhaps even more relevant, however, is that the various licensing fees you pay can also be deducted.
Employees’ wages can also be deducted. This includes any salaries, commissions or bonuses. This does not apply to any employee benefits you provide your employees, which can be deducted separately on another line. It also does not apply to any salary you pay yourself.
You can encourage these construction contractors to stay organized, record their income and expenses, and retain receipts year-round. Stay in touch with them to ensure they are following through with their tax and accounting obligations.
Editor’s note: This article was originally published on April 4, 2017, and republished with updates on May 15, 2019. Portions of this article originally appeared on AccountingWEB.