FAQs
Construction Accounting Questions, Answered
Plain answers to the questions contractors ask most. No accountant-speak.
Bookkeeping Basics
What is job costing and why does it matter for construction companies?
Job costing tracks costs by project rather than lumping everything together. For a contractor, that means logging labor, materials, subcontractor payments, and overhead against each specific job. When done right, you can see exactly what a job cost and whether you actually made money on it. Without job costing, you know your total bank balance but you have no idea if a job that billed $80,000 made you $20,000 or lost you $5,000. Most general bookkeepers don’t set this up. Construction bookkeeping builds it in from the start.
What is a WIP report in construction accounting?
WIP stands for work in progress. A WIP report tracks revenue and costs on jobs that are partially complete at the end of an accounting period. It prevents you from recognizing income before the work is actually done, which keeps your financial statements accurate. Banks and bonding companies often require a WIP schedule. If your books don’t include WIP tracking, your reported profit is almost certainly wrong.
What is CIP accounting and what type of account is construction in progress?
CIP stands for construction in progress. In accounting, it’s a long-term asset account used to accumulate all costs associated with a project under construction — materials, labor, equipment — before the project is complete and transferred to a fixed asset account. It sits on the balance sheet as an asset rather than flowing through profit and loss until the project is finished. For contractors building assets for clients, CIP is handled differently than for companies building assets for their own use. See our bookkeeping service for how we handle this.
What is retainage and how do I track it?
Retainage is a percentage of each draw — typically 5-10% — that the general contractor or owner holds back until the job is complete and accepted. You’ve earned the money, but you don’t have it yet. That means it needs to show on your books as a receivable, not as paid income. Tracking retainage incorrectly is one of the most common cash flow problems contractors face. QuickBooks can handle it, but it needs to be set up correctly from the start.
What are the top bookkeeping mistakes construction contractors make?
The most common ones: not doing job costing at all, mixing business and personal expenses in the same account, paying subcontractors without tracking 1099 eligibility, not reconciling accounts monthly, treating draws as profit instead of revenue earned on a percentage-complete basis, and falling months behind on the books then guessing at tax time. Each one creates a real problem — an unexpected tax bill, a cash flow blind spot, or IRS trouble at year-end. Book a free QuickBooks review to find out which ones apply to your current setup.
Do independent contractors need a business bank account?
Yes. Mixing business and personal funds makes your books nearly impossible to reconcile accurately, exposes personal assets to business liabilities, and creates headaches at tax time. The IRS also looks more favorably on businesses that clearly separate finances. If you’re running any volume of transactions through a personal account, opening a dedicated business checking account is the single best thing you can do for your bookkeeping this month.
Payroll and Subcontractors
What's the difference between a W-2 employee and a 1099 subcontractor?
A W-2 employee is on your payroll — you withhold taxes, pay employer payroll taxes, and report wages at year-end on a W-2. A 1099 subcontractor is an independent business you hire for specific work — no withholding, no payroll taxes on your end. You report payments over $2,000/year on a 1099-NEC — that’s the current IRS threshold. The distinction matters legally: misclassifying employees as subs is a common audit trigger and can result in back taxes, penalties, and interest. The IRS uses a behavioral control test — if you control how the work is done, not just the outcome, they’re likely an employee.
When do I need to file a 1099-NEC for a subcontractor?
You’re required to file a 1099-NEC for any unincorporated subcontractor or vendor you paid more than $2,000/year (the current IRS threshold) during the calendar year for services. That includes sole proprietors, LLCs taxed as partnerships, and individuals. You don’t file a 1099 for incorporated entities — S-Corps and C-Corps are exempt, with some exceptions. The deadline is January 31 of the following year. Missing 1099s is an audit flag. We track 1099 eligibility throughout the year so there are no surprises at filing time. See our payroll service for how 1099 filing is handled.
Can you handle payroll for a crew that works in multiple states?
Yes. Multi-state payroll requires registering as an employer in each state where employees work, withholding the correct state income taxes, and filing separate state payroll returns. It’s more complex than single-state payroll but entirely manageable with the right setup. We run payroll through Gusto, which handles multi-state compliance automatically. If you have crew working in Florida and North Carolina on the same project, we’ll get it set up correctly from the start.
Tax and Planning
What is an Enrolled Agent and how is that different from a CPA?
An Enrolled Agent (EA) is a federally licensed tax practitioner — licensed directly by the IRS, not a state board. EAs specialize specifically in tax: filing, planning, and representation before the IRS. CPAs are licensed by state boards and can have a broader practice across audit, advisory, and financial reporting — many are excellent at tax, but it’s not always their primary focus. An EA with construction clients is often more specialized in contractor tax issues than a general-practice CPA. Chris Fallon is an IRS Enrolled Agent, which means he can represent you in an audit or IRS dispute anywhere in the country. Learn more about Chris.
Should my construction company be an S-Corp or stay an LLC?
It depends on your net profit. Generally, converting from a single-member LLC to an S-Corp starts saving money once you’re netting $50,000-$60,000 or more per year, because you can pay yourself a reasonable salary and take the rest as a distribution — avoiding self-employment tax on the distribution portion. But S-Corps add compliance overhead: payroll, additional filings, and stricter record-keeping. We walk through this during the free QuickBooks review and model it out with your actual numbers before recommending a change.
How does Section 179 equipment depreciation work for contractors?
Section 179 lets you deduct the full cost of qualifying equipment in the year you buy it, rather than depreciating it over several years. For contractors, that includes trucks, trailers, tools, heavy equipment, and certain software. The 2025 limit is $1,220,000. Bonus depreciation works similarly but phases down after 2026. Used correctly, equipment purchases can significantly reduce your taxable income for the year. But timing and the interaction with your entity structure matters — which is why we plan for this proactively, not just at tax time. See tax planning for what’s included.
Working with Foundations
Should I outsource my construction bookkeeping?
For most contractors, yes. Bookkeeping takes time you don’t have and requires construction-specific knowledge that a general bookkeeper often lacks. Job costing, WIP, retainage, certified payroll, and 1099 tracking all have nuances that trip up generic setups. The cost of outsourcing — typically $300-$600/month depending on volume — is usually less than the value of your time, and far less than the cost of bad books at tax time. The real question is whether you’re outsourcing to someone who actually knows construction or just someone who knows QuickBooks.
My books are months behind. Can you fix that?
Yes — this is how most new clients come to us. We do a catch-up first: reconcile all accounts, classify transactions correctly, set up job costing if it’s missing, and get the books current. Once they’re clean, we move to monthly maintenance. How long catch-up takes depends on volume and how far back things go. We give you a clear timeline and price before starting. Most contractors are surprised how quickly it can be done when someone who knows what they’re doing digs in. Book a free QuickBooks review to get started.
Can you help me if I'm based in a different state?
Yes. We work with contractors nationwide. Everything runs over Zoom and cloud software — QuickBooks Online, Gusto, and Bill.com all work remotely. The free QuickBooks review is a 30-minute Zoom call, and ongoing bookkeeping is handled completely online. You never need to drop off paperwork or come to an office.
How do I know if my current QuickBooks setup is correct?
Most setups we see have at least one serious problem: transactions in the wrong accounts, job costing not configured, a chart of accounts that was auto-generated and never customized for construction, or months of unreconciled bank feeds. The easiest way to find out is the free QuickBooks review — we look at your actual file, tell you what’s wrong, and give you a price to fix it. No obligation.
How long does it take to get started?
Usually one to two weeks from the free review to having clean, current books. The review itself is 30 minutes. After that, we do a proposal, you sign, and we get access to your QuickBooks file. Catch-up work runs in parallel with ongoing bookkeeping. For contractors with simple setups, we can sometimes be fully operational within a week.
Do I need Bill.com for A/P management?
Only if you want the full A/P service — bill processing, vendor payment scheduling, and retainage tracking through an integrated platform. Bill.com ($65/month) automates a lot of the manual work and gives you an audit trail for every payment. If you’re currently paying bills yourself out of your bank account and don’t need the tracking, you may not need it. We’ll tell you honestly whether it makes sense for your volume during the free review. See our A/P management service for details.
Still have questions?
Book a free QuickBooks review. Thirty minutes on Zoom, we look at your setup, and you leave with answers.