Contents
- Why trade businesses need their own approach
- Step 1: Separate business and personal money
- Step 2: Choose a method and tools
- Step 3: Set up a chart of accounts that shows job profit
- Step 4: Track costs by job
- Step 5: Handle deposits, progress billing and retainage
- Step 6: Subcontractors, payroll and worker classification
- Step 7: Sales tax and your own taxes
- Step 8: Run a monthly close
- Reports to read every month
- When to get help
- Mistakes to avoid
Most contractors get into the trade to fix things, not to reconcile bank statements. But the books are where you find out which jobs actually made money, whether you can afford the next truck and how much to set aside for taxes. Messy books don't just make tax season painful. They hide the jobs that are quietly losing you money.
This is general education to help you understand the basics and ask better questions. Rules for taxes, payroll and sales tax vary by country, state and business structure, and they change. Set up your system with an accountant who knows construction or home services, and confirm the specifics with them.
Why trade businesses need their own approach
A contractor's money moves differently from a shop's or an office's:
- You often buy materials before the customer pays.
- You may take deposits before the work starts.
- You may pay subcontractors, rent equipment and pull permits for specific jobs.
- Commercial customers may hold back part of the payment until the project is finished.
- Trucks, tools and fuel are big costs that are partly job-related and partly overhead.
A generic bookkeeping setup lumps all of this together. A contractor setup separates it so you can see profit by job and by type of work.
Step 1: Separate business and personal money
This is the foundation, and it's where many small shops go wrong.
- Open a business checking account and use it for every business deposit and payment.
- Get a business credit card for supply houses, fuel and software.
- Don't pay business bills from a personal account, or personal bills from the business account.
- Pay yourself in a consistent way. Depending on your business structure, that might be an owner's draw or a salary through payroll. Ask your accountant which applies to you.
When money is mixed, every transaction needs detective work, and you lose deductions you can't prove.
Step 2: Choose a method and tools
Cash or accrual
- Cash basis records income when you receive it and expenses when you pay them. It's simpler and shows what's in the bank.
- Accrual basis records income when you earn it (usually when you invoice) and expenses when you owe them. It gives a truer picture of profit in a month when a lot is invoiced but unpaid.
Which method you use for taxes is a decision to make with your accountant, and it can differ from the reports you use to run the business. Many owners find accrual-style reports more useful for judging job profit, even when they file on a cash basis. Ask.
Tools
Most contractors use some combination of these:
- Cloud accounting software for the books themselves.
- Field service or invoicing software that sends invoices and payments to the accounting software.
- A receipt capture app, or the one built into your accounting software, so paper receipts get photographed the day they're received.
- A payroll service if you have employees.
When comparing tools, check: bank and card feeds, a way to tag income and costs by job or by job type, a working connection to your field service software, access for your accountant, and whether your accountant is comfortable with it. Features and prices change, so check current terms.
Step 3: Set up a chart of accounts that shows job profit
The chart of accounts is the list of categories your money is sorted into. The key for contractors is to separate direct job costs from overhead. That split gives you gross profit, the number that shows whether your pricing works.
| Group | Example accounts |
|---|---|
| Income | Service and repair, installations and replacements, maintenance agreements, recurring service |
| Direct job costs (cost of goods sold) | Materials, field labor wages, field payroll taxes and benefits, subcontractors, equipment rental, permits, disposal and dump fees |
| Overhead | Office wages, rent, vehicle costs, fuel, insurance, software, marketing, phones, small tools, licenses, training |
| Balance sheet | Business bank accounts, accounts receivable, retainage receivable, customer deposits, vehicles and equipment, loans, credit cards, sales tax payable |
Adjust to your trade. A roofer may want separate lines for dumpsters and disposal. A landscaper may track plant material, fuel and equipment repair separately. A cleaning company may split supplies from labor by service type. An electrician may track wire and breakers apart from light fixtures that customers choose. Keep the list short enough that you'll actually use it; your accountant can help you set it up.
Step 4: Track costs by job
Gross profit for the whole business is useful. Gross profit by job is where you learn what to charge.
- Give every job a number, and use it everywhere.
- Ask your supply house to put your job number or customer name on every account purchase.
- Track field hours by job, not just by day.
- Record subcontractor bills and equipment rental against the job they belong to.
- After each larger job, compare estimate with actual.
A hypothetical example: you estimate a bathroom rough-in at $1,200 of materials and 16 labor hours. The actual numbers come in at $1,450 and 22 hours. Now you know to check whether the estimate missed something, whether prices went up, or whether the job ran into surprises you should price for next time. See job costing and the job costing calculator.
Step 5: Handle deposits, progress billing and retainage
These trip up a lot of contractors because the money arrives at a different time from when it's earned.
- Deposits. Money received before the work is done usually isn't revenue yet. Many accountants record it as a liability (often called "customer deposits") until the work is done, then move it to income. If you count deposits as income, a month full of deposits can look far more profitable than it is.
- Progress billing. On multi-stage work, like rough-in and then trim, bill at each stage and record what's been billed against the job's total.
- Retainage. On commercial work, the customer may hold back part of each payment until the project is complete. Record it as money owed to you so it doesn't get forgotten, and put a reminder on the calendar to invoice for it.
- Change orders. Get them in writing, price them, and bill them. An unbilled change order is free work.
Ask your accountant how they want each of these recorded.
Step 6: Subcontractors, payroll and worker classification
- Before you pay a subcontractor, collect their tax information (a W-9 in the US) and a current certificate of insurance. Keep both on file.
- Track what you pay each sub during the year. In the US, you may need to file information returns (1099 forms) for subs you pay above a threshold. Your accountant will know the current threshold and deadlines.
- Employee or contractor is a legal question with real consequences, not a choice based on what's easier. If someone works your hours, uses your tools and wears your shirt, ask your accountant or an employment lawyer before you treat them as a contractor.
- Use a payroll service for employees, so taxes are calculated, withheld and deposited on time.
Step 7: Sales tax and your own taxes
- Sales tax. Rules for contractors vary widely. In some places, contractors pay tax on materials when they buy them. In others, they charge tax on materials, or on some services, to the customer. Some treat repair work and new construction differently. Don't guess. Ask your accountant what applies in each place you work.
- Income tax. If your business profits pass through to you, you may need to make estimated tax payments during the year. Ask your accountant how much to set aside and when to pay.
- A tax savings account. Many owners move a set share of each deposit into a separate savings account so tax money isn't spent by accident. Your accountant can suggest the right share.
Step 8: Run a monthly close
A monthly routine keeps small problems from becoming a tax-season disaster. Pick a date, such as the 10th of each month, and work through this list.
Reports to read every month
- Profit and loss, with a gross profit line. Is gross margin steady, rising or falling?
- Balance sheet. What do you own, what do you owe, and what's owed to you?
- Accounts receivable aging. Who owes you, and for how long?
- Job profitability. Which jobs and job types made money?
- A simple cash forecast for the next eight weeks: expected payments in, bills and payroll out.
For the operating numbers to track alongside these, see the numbers every home service business should track and how to work out your real profit margin.
When to get help
A bookkeeper records transactions, reconciles accounts and produces monthly reports. An accountant (in the US, often a CPA) advises on structure, taxes and planning and prepares tax returns. Many contractors use both.
Consider hiring a bookkeeper if you're more than a month behind, if you're doing the books late at night after a full day on jobs, or if you can't answer "did we make money last month?"
Questions to ask a bookkeeper or accountant before you hire:
- Do you work with other contractors or home service businesses?
- How do you handle deposits, retainage and job costing?
- Which accounting and field service software do you work with?
- What will I get each month, and by what date?
- How do you charge: monthly, hourly or per task?
Mistakes to avoid
- Mixing personal and business money.
- Counting deposits as profit.
- Recording owner draws as business expenses.
- Losing receipts for small purchases, which add up.
- Not keeping records of business vehicle use. Ask your accountant which method and records they need.
- Leaving everything until tax season.
Good books show you which jobs are worth chasing. Once you know that, it's easier to point your marketing at more of them. When you get there, Zome's free AI report shows how your business looks online to the customers you want.
