Construction taxes: A contractor’s guide for 2023

Taxes are an important part of construction operations. Unfortunately, construction taxes are complex, variable and prone to mistakes. This makes staying in compliance with tax regulations especially challenging.

Whether you’re a homeowner or a construction business, it’s essential to have a good understanding of the different types of construction taxes, how they are applied and how to manage them efficiently. Use this guide to help manage your tax compliance alongside your construction accounting strategies.

What are construction taxes?

Construction taxes are payments required on construction-related activities. This can include the sale of construction materials, labor and equipment.

For example, in Nebraska, the sales tax rate on construction work is 5.5%. If a contractor completes $20,000 of work on a construction project, they would be required to collect an additional $1,100 in sales tax from their client.

Who is a tax authority?

A tax authority is the agency responsible for enforcing tax laws in a particular jurisdiction. They typically exist at the local, state and national level. For example, in the U.S., some tax authorities include:

• The IRS – federal
• The Department of Revenue – state
• The Department of Taxation – state
• County tax assessors – local
• City or municipal tax authorities – local
• School district tax authorities – local
• Special district tax authorities – local

While the responsibility for collecting construction sales tax and property taxes may vary based on jurisdiction, it typically belongs to local tax authorities.

Who needs to pay construction taxes?

The parties responsible for paying construction taxes may depend on where a construction project is taking place.

In some states, contractors and subcontractors are needed to collect sales taxes on their services and send them to the appropriate tax authority, while property owners are responsible for paying property taxes.

How does construction sales tax change by state?

The rules and regulations around sales tax on construction work can change from state to state. Here are some examples of how responsibilities vary by location.

Texas

In Texas, the homeowner is generally responsible for paying sales tax on construction work. Contractors must provide an invoice to the homeowner that includes the labor and materials costs, as well as the applicable sales tax. The homeowner then pays the total amount – including sales tax –  to the contractor, who’s responsible for sending the sales tax to the appropriate tax authority.

Florida

In Florida, the responsibility for paying sales tax on construction work can vary depending on the specific type of construction project. For example, on residential construction projects, a contractor may not be required to collect and remit tax. Instead, homeowners must report and pay the tax directly to the state. However, on commercial construction projects, the contractor is generally responsible for collecting and remitting sales tax on construction work.

California

In California, the contractor is generally responsible for collecting and sending sales tax on construction work. The contractor must include the sales tax in their invoice to the homeowner before sending the collected sales tax to the appropriate tax authority. However, there are some exceptions to this rule, such as when the homeowner purchases materials directly and hires the contractor for labor only. Additionally, construction labor generally isn’t taxable in California.

Depending on the type of construction project and location, some construction services may also be exempt from sales tax. In Illinois, for example, certain construction services performed on structures used in agriculture may be exempt.

While we’ve provided some examples above, it’s important to consult with a tax professional or government authority in your place of business to double check your construction tax compliance.

What types of taxes do construction professionals need to pay?

Construction companies may need to pay different types of taxes depending on the nature of the construction projects they complete.

Construction sales tax

This tax is imposed on the sale of tangible personal property used in construction, including building materials, fixtures and equipment.

Use tax

Use tax is a levy on the use or storage of tangible personal property purchased outside of the state where it will be used. You may be subject to use tax if you purchase materials or equipment outside of your home state.

Payroll tax

Construction businesses with employees are required to withhold and remit payroll taxes on behalf of their employees. Federal income, Social Security and Medicare taxes are some examples of what’s included in benefits and tax prep.

Property tax

Construction companies that own or lease property used in their business may be required to pay property taxes.

Excise tax

Excise taxes are applied to specific goods or services, such as gasoline or alcohol. If your residential construction company operates vehicles or heavy machinery, you may need to pay a federal excise tax on fuel. Custom home builders may also need to pay a luxury excise tax, which applies to high-end homes valued at more than $1 million.

Permit and licensing

For many construction projects, permits and licenses are required to perform certain types of work. The fees required to obtain these permits and licenses are similar to a tax because they may be based on the value or cost of a construction project. They also generate government revenue that may be used to fund public services and programs. 

How to track, calculate and prepare for construction taxes in 2023

Tracking, calculating and preparing for construction taxes can be a challenging process. Here are several steps you can take to make the process more manageable.

1. Determine the applicable tax laws

It’s important to determine the applicable tax laws based on the location(s) of your construction project. This may involve researching state and local tax codes, as well as consulting with tax professionals to ensure that all relevant taxes are identified.

2. Identify the taxable items

Once you’ve identified the tax laws that apply to your business, identify your taxable items. This may include materials, equipment and labor costs, among other expenses.

3. Calculate the tax amount

Next, calculate the tax amount based on your tax rate. Again, tax rates may differ based on the location and type of your construction project.

4. Prepare for payment

To help prepare for payment, set aside funds in your cash reserves. That way, you can cover tax payments and fulfill subcontractor payments without going into the red.

5. Keep accurate records

The same way you need a single source of truth for your construction documentation, you also need to keep an accurate record of tax documentation. This can include invoices, receipts and records of tax payments. This will help to ensure compliance with tax laws and regulations, as well as simplify the process of preparing tax returns and responding to tax audits.

6. Take advantage of construction tax software

Understanding construction taxes is hard. Construction tax software can automate many tax-related tasks, including tax rate calculations and record keeping. This can help your business track and manage construction taxes – and stay in compliance.

How Buildertrend helps you manage your taxes

Buildertrend’s construction finance software is designed to support tax compliance for construction builders and remodelers. This includes accounting for tax information on invoices. This helps our customers easily and accurately track taxes on revenue and expenses, while building their confidence in their financial records.

Learn more about Buildertrend’s financial tools for construction companies today.

Construction tax FAQs

Get answers to the most common construction tax questions.

While Buildertrend is committed to providing tools to help support your tax compliance, it’s important to note that the specific rules and regulations regarding the collection of construction sales tax and property taxes can vary based on jurisdiction. To ensure compliance, consult a tax professional or government representative in your area to determine who is responsible for taxes based on your circumstances.