Taxes and bookkeeping for contractors in California

April comes and many contractors do the same thing: they hunt for receipts in the truck, on the phone, and in a shoebox. Meanwhile, the tax preparer is waiting for clear numbers.

This guide is for owners of construction, landscaping, roofing or remodeling businesses in California. It is informational and educational: it is not tax advice. It explains which taxes usually come up and how to get your records ready.

In short

• The taxes you owe depend on your structure, your income, and whether you have employees. Your tax preparer, CPA, or enrolled agent can confirm it.
• To pay less in taxes the right way, you first need to know how much you really earn. That takes up-to-date records.
• An expense without a receipt is hard to defend if you are asked for proof.
• Paying in cash without a paper trail is not a savings: it is a risk.
• The bookkeeper keeps the books; the tax preparer files the returns. They complement each other.

Taxes that commonly apply to a business in California

These are the most common. Not all apply to every business.

Self-employment tax

According to the IRS, this tax covers Social Security and Medicare for people who work for themselves. In general, it applies when your net earnings for the year reach $400 or more.

It usually affects those who operate as a sole proprietor or as members of certain LLCs. How it applies to you depends on your structure.

Federal and California income tax

Business income is reported to the IRS and, in California, to the Franchise Tax Board (FTB). Which form you use depends on whether you are a sole proprietor, LLC, partnership, or corporation.

In California, LLCs and corporations can also have a state annual minimum tax. Check it with your tax preparer.

Payroll taxes

If you have employees, you must withhold and pay payroll taxes and file the required reports. A payroll service or your tax preparer usually handles this.

Sales tax

If you sell products, and in some cases other services, you may need to register with the CDTFA. In construction, this depends on the type of contract and how you charge for materials. Confirm it with a professional or with the CDTFA.

Gross income vs. net income: why your records matter

Gross income is all the money that comes in. Net income is what is left after subtracting the business expenses.

Example: a concrete contractor bills $120,000 in the year. If he spent on material, fuel, helpers, and insurance, his real profit is much lower. But if he has no record of those expenses, it is hard to prove.

The IRS explains that you can use whatever records system works best for you, as long as it clearly shows your income and expenses. It also says you must be able to back up what you report with documents.

Documents worth keeping

• Invoices sent and bank deposits (they support your income).
• Receipts, vendor invoices, and bank or card statements (they back up your expenses).
• Canceled checks or electronic payments.
• Contracts, 1099 forms, and payroll records.

Digital receipts, like a clear photo or a PDF, usually work if they are legible and you can find them. Still, what documentation each authority accepts depends on the case. Ask your tax preparer.

How long to keep them

The IRS says the time depends on each situation. As a general rule, keep records at least 3 years from when you file your return, and employment tax records at least 4 years. Some cases require longer, such as property records. See the IRS full guide or ask your tax preparer.

The risk of paying cash with no record

Paying vendors or helpers in cash seems like a way to "save." But if no record is left, the expense has no backup.

• No receipt, no backup: if there is no receipt, invoice, or corresponding form, the payment is hard to prove.
• Possible audits and penalties: paying workers without reporting can cause problems with the IRS, the EDD, or other agencies.
• Labor risk: if you misclassify a worker or don't cover what you should, you can face claims. Ask an attorney or your tax preparer.

Paying in cash is not illegal in itself. The problem is not documenting it. If you pay in cash, ask for a receipt and record it.

If you want to go deeper, read the myth of paying in "cash".

Bookkeeper and tax preparer: each does something different

The bookkeeper records and organizes your income and expenses throughout the year. The tax preparer, CPA, or enrolled agent prepares and files the returns, and advises you on what is deductible.

When your books arrive complete, the tax preparer works faster and with fewer questions. And you see your numbers all year, not just in April.

What to do now

• Open a bank account just for the business and do not mix in personal expenses.
• Save every receipt, with a photo the same day.
• Write down every cash payment and ask for a receipt.
• Review your books once a month: income, expenses, and unpaid invoices.
• Ask your tax preparer which taxes you owe this year and on what dates.

When to talk to a professional

Talk to a tax preparer, CPA, or enrolled agent if you have employees, if you are going to change your structure, if you received a letter from an agency, or if you are not sure which expenses you can deduct. For legal matters, consult an attorney.

How ODC helps you

At Oficina del Contratista we keep your books up to date so you arrive organized at your tax preparer. Learn about our bookkeeping for contractors service and how we coordinate with independent tax partners. ODC does not prepare taxes or give tax advice.

References

1. IRS: Recordkeeping — which records to keep, how to back them up and how long to keep them.
2. IRS: Self-employment tax (Social Security and Medicare taxes) — who pays self-employment tax.
3. California FTB: Business Filing Information — business tax returns in California.
4. CDTFA: California Department of Tax and Fee Administration — sales tax and permits in California.
5. IRS: Small Business and Self-Employed — general information on business taxes.

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This article is for information and education only. It is not legal, tax or bookkeeping advice. We are a bookkeeping service: for tax matters, consult a tax preparer, CPA or enrolled agent.