Starting a contracting business: the money setup, in order

Most contractors start their own business because they are good at the work, not because they enjoy paperwork. That is exactly why the first ninety days matter so much: every habit set now either keeps the books easy for years or turns them into a project that has to be rescued later, usually in March.

This is the money side of starting out, in the order to do it. Licensing, insurance requirements and permits depend on your trade and your state and are not covered here — check those with your state licensing board.

1. Choose the structure deliberately

Sole proprietorship, LLC, or an LLC taxed as an S-corporation. The choice affects liability, how you pay yourself, and how much tax you pay once the business is profitable. Many contractors start as a single-member LLC and revisit the tax election once profit is steady.

This is a conversation to have with a CPA before you file, not after. The trade-offs are laid out in LLC or S-corp for contractors.

2. Get an EIN and open business accounts

An Employer Identification Number from the IRS is free and takes minutes online. Use it to open a business checking account and get a business card. Every business dollar goes through them, and nothing personal does — not “mostly”.

This single step decides how hard your bookkeeping will be for as long as you own the business. See separating business and personal money.

3. Register for sales tax if your state requires it

Whether contractors collect sales tax, pay it on materials, or both depends on the state and sometimes on the type of work. Find out before your first invoice, not after your first notice. See sales tax for contractors.

4. Set up the books properly on day one

Accounting software connected to your bank and card, and a chart of accounts that separates job costs from overhead from the start. It is far easier to set up correctly with no history than to restructure a year later. Our contractor chart of accounts is a starting point you can copy, and which accounting software covers the choice of system.

Set up jobs from the first job. Even as a one-person operation, knowing which jobs made money is the most useful number you will have.

5. Price from real numbers, not the going rate

New contractors most often underprice because they charge what they earned per hour as an employee, or what a competitor charges. Neither covers what running a business costs: insurance, the truck, tools, software, licensing, the hours you cannot bill, and your own pay.

Work out what an hour actually has to earn with the true hourly cost calculator, and your break-even with the break-even calculator. It is much easier to start at the right price than to raise it on customers who got used to the wrong one.

6. Set aside tax money from every deposit

No employer is withholding tax for you anymore. Most new business owners owe quarterly estimated taxes, and the first April without a plan is one of the most common reasons new contracting businesses get into trouble.

The simplest system: a separate savings account, and a fixed percentage of every deposit moved into it the day it arrives. Your CPA can set the percentage; the tax set-aside calculator gives you a starting estimate. See quarterly estimated taxes.

7. Collect paperwork from subs before you pay them

The first time you pay a subcontractor, get a W-9 and a current certificate of insurance first. It feels like a formality with your first sub. By your tenth it is the difference between a January 1099 run that takes an hour and one that takes a week — and an uninsured sub’s payroll can end up on your own insurance bill at audit. See who needs a 1099.

8. Pay yourself on purpose

Decide how you will take money out — an owner’s draw or a salary, depending on your structure — and take it on a schedule, not whenever the account looks full. See how much should I pay myself.

9. Before your first employee

Hiring your first employee brings payroll, payroll tax deposits, workers’ compensation and new filings. Use a payroll provider rather than doing it by hand, and understand that payroll taxes withheld from employees are held in trust — the most dangerous bill in the business to fall behind on. See you missed a payroll tax deposit, and 1099 or W-2 for the classification question that comes before hiring anyone.

10. Close every month

Reconcile the bank and card every month and look at the numbers — revenue, job margins, what is owed to you. Twenty minutes a month in year one is the habit that makes year three manageable. The contractor bookkeeping checklist lists everything, weekly to yearly.

Related

• Bookkeeping when it is just you and a truck
• Construction bookkeeping, step by step
• When to hire a bookkeeper

General information, not tax or legal advice. Entity choice, sales tax registration, licensing and payroll obligations depend on your state and your situation.