Bookkeeping and Tax for Contractors and Construction Companies in Los Angeles

Situations We Handle

Crews on payroll and subs on 1099. A contractor registers with the EDD as an employer within 15 days of paying more than $100 in wages in a calendar quarter. Federal payroll taxes are reported on Form 941 by April 30, July 31, October 31 and January 31, and California wages on the DE 9 and DE 9C, delinquent after the last day of the month following each quarter. Subcontractors who are not corporations receive Form 1099-NEC once payments reach $2,000 in the year, starting with 2026 payments; payments to a corporation are generally exempt, except for legal services, and the form is due by January 31, which for 2026 payments is February 1, 2027. A payee who does not give a correct taxpayer identification number on Form W-9 is subject to backup withholding of 24 percent. We run the payroll, file the quarterly returns and prepare the W-2s, and keep each subcontractor's year-to-date total in the books so the 1099s are prepared from the records rather than reconstructed in January. See Payroll.

Choosing the accounting method. A business whose average annual gross receipts for the three prior tax years are $31 million or less ($32 million for tax years beginning in 2026), and that is not a tax shelter, may use the cash method. Long-term contracts are generally accounted for under the percentage-of-completion method of section 460, except certain real property construction contracts; a construction contract estimated to be completed within 2 years of its start, by a contractor whose average annual gross receipts for the three prior tax years do not exceed $31 million for contracts entered into in tax years beginning in 2025, is outside the look-back method of Form 8697, and the definition of a home construction contract changed for tax years beginning after July 4, 2025. The method decides the year in which a progress payment, a retention balance or an unbilled job is taxed, so we settle it with you before the first return, apply it the same way each year and keep the contract list that supports it in the file. See Business Tax Preparation.

Trucks, tools and equipment. For tax years beginning in 2026 section 179 allows up to $2,560,000 to be deducted in the year equipment is placed in service, reduced once section 179 property placed in service exceeds $4,090,000, and the 100 percent special depreciation allowance is permanent for qualified property acquired after January 19, 2025. California allows a maximum section 179 deduction of $25,000, reduced when section 179 property placed in service exceeds $200,000, and does not conform to the special depreciation allowance. A vehicle used for the business can instead be deducted at the standard mileage rate of 72.5 cents a mile for January through June 2026 and 76 cents for July through December. We keep a federal and a California depreciation schedule for every asset and show the difference between the two returns each year.

Retention and progress payments. On private works the owner pays retention to the direct contractor within 45 days after completion, the direct contractor pays each subcontractor's share within 10 days of receiving it, and an amount wrongfully withheld carries a penalty of 2 percent per month. On public works retention may not exceed 5 percent of each payment or of the contract price, and a progress payment received by a contractor is passed to each subcontractor within 7 days unless the parties agree otherwise in writing. These are the statutes, not legal advice; what they mean for the return is that the year a retention balance is taxed follows the accounting method above, so the contract terms and the payment dates belong in the file for each return.

Public works and certified payroll. Public works projects over $1,000 pay prevailing wages under Labor Code Section 1771; certified payroll records go to the Labor Commissioner through the eCPR system at least monthly, or more often when the contract requires it, and the small-project exemption covers new construction of $25,000 or less and maintenance work of $15,000 or less. A contractor on public works registers with the Department of Industrial Relations for $400 per fiscal year. Our payroll service covers the wages, deposits, quarterly returns and W-2s for the crew; the certified payroll records are the contractor's own filing under the contract, prepared from the same payroll figures.

Subcontractor or employee. A construction subcontractor is judged under the Borello test rather than the ABC test when the subcontract is in writing, the subcontractor holds a Contractors State License Board license for the work, has any required business license or business tax registration, keeps a business location separate from the hiring contractor's, can hire and fire, carries its own financial responsibility through insurance, indemnity, a bond or warranties, and is customarily engaged in an independently established business of the same nature as the work performed. A license is required to build or alter a structure in California when the project needs a building permit, uses any employee labor, or the labor and materials of one or more contracts come to $1,000 or more, and a larger job may not be split into pieces under $1,000. A licensee keeps a workers' compensation policy on file or a signed exemption certifying it has no employees; the exemption is not available to the C-8, C-20, C-22, C-39 and C-61/D-49 classifications, hiring anyone voids it, and the exemption statute is shown as repealed effective January 1, 2028. The reporting follows the classification: W-2 and payroll taxes for an employee, Form 1099-NEC for a subcontractor.

Materials, fixtures and sales tax. California treats a construction contractor as the consumer of the materials it installs and the retailer of fixtures, so most contractors hold a seller's permit; a contractor not required to hold one but with $100,000 or more in annual gross receipts registers for a Consumer Use Tax Account, and the treatment differs between a lump-sum contract and a time-and-material contract. From October 1, 2026 the combined rate is 10.25 percent in the City of Los Angeles, 11 percent in Burbank and Glendale, 11.25 percent in Calabasas, 10.25 percent in Agoura Hills and Westlake Village, 7.25 percent in Thousand Oaks, 7.75 percent in Irvine and 9.25 percent in Santa Ana. The books we keep record materials, fixtures and labor on separate lines on each job so the sales and use tax return can be prepared from them.

From sole proprietor to LLC or S corporation. A sole proprietor reports the business on Schedule C and pays self-employment tax of 15.3 percent on 92.35 percent of net earnings once they reach $400, with the 12.4 percent Social Security part stopping at $184,500 of earnings for 2026. An S corporation pays its owner reasonable compensation through payroll before any distributions and pays California 1.5 percent of its net income with an $800 minimum franchise tax, waived in its first taxable year, while an LLC pays the $800 annual tax from its first year. We compare the tax under each structure with the contractor's own figures, then form the entity and file Form 2553 within 2 months and 15 days of the start of the tax year the election is to take effect. See LLC or S Corporation in California and CPA for New Businesses.