Bookkeeping for Contractors: A Simple System and How to Work With an Accountant

Bookkeeping is recording every dollar that comes in and goes out of the business, in categories, so you know whether you’re making money and your accountant can file your taxes. By the end of this lesson you’ll have a category list that fits a trade business, a 30-minute weekly routine, a monthly close checklist, a habit for setting tax money aside, and a list of what to ask and send your accountant.

This lesson is an introduction, not tax advice. It covers what to pay attention to as a new business. Your accountant decides how your books and taxes should be set up, based on your business structure and state.

1. A separate business bank account and card, used only for the business. Separating business and personal finances walks through it.
2. Bookkeeping software, connected to that account, so transactions come in by themselves. Ask your accountant which software they work with; it saves you both time.
3. One way to capture receipts the day you get them (see organizing your business documents).
4. Ask your accountant which accounting method to use. With the cash method, income counts when you’re paid and expenses when you pay; with accrual, when you invoice and when you’re billed. They’ll pick the one that fits.

Your accountant may adjust these, but a simple list keeps job costs apart from overhead, which is what tells you whether your prices work (fixed vs. variable costs).

Keep the list short. Twenty categories you use correctly beat sixty you guess at.

Same day every week:

1. Categorize every new transaction in your bookkeeping software.
2. Match receipts to card and bank transactions. A transaction without a receipt gets a note: what it was and which job.
3. Tag job costs to the job they were for, so you can see each job’s profit.
4. Check open invoices: who owes you, and who’s late. Send reminders.
5. Record payments received in cash or by check, and deposit them.

In the first week of each month, for the month before:

1. Reconcile every account: the balance in your software matches the bank and card statements.
2. Review the profit and loss report: income, job costs, overhead, profit.
3. Check job profit on each finished job: what you priced against what it really cost.
4. Move tax money to a separate savings account (next section).
5. Save the statements in the year’s Money folder.
6. Write down one question for your accountant, instead of guessing.

Nobody withholds tax from your job income, so you have to. Two IRS facts to know as a sole proprietor:

• You report business income or loss on Schedule C, used “to report income or loss from a business you operated or a profession you practiced as a sole proprietor.”
• On top of income tax, “The self-employment tax rate is 15.3%” (IRS), and it applies if “Your net earnings from self-employment … were $400 or more.”

You may also have to pay estimated tax during the year, generally if you “expect to owe tax of $1,000 or more when their return is filed.” The dates are in contractor taxes, deadlines and renewals.

The habit: every time a customer pays you, move a set percentage into a separate tax savings account. Ask your accountant what percentage to use; it depends on your income, state and deductions. Don’t guess low.

Example
Your accountant suggests 25% for your situation. A customer pays an invoice of $1,755.
$1,755 × 0.25 = $438.75 goes to the tax account the same day.
Example rate only: yours may be higher or lower.

If your business is an LLC taxed differently, or an S corporation, the forms and rules change. Your accountant will tell you which apply.

Who does what:

Questions to ask before you hire one:

1. Do you work with other trade contractors or small construction businesses?
2. What do you do, and what do you expect me to do?
3. Which bookkeeping software do you prefer, and can you access mine directly?
4. How do you charge: per return, monthly, or by the hour?
5. Will you tell me what to set aside for taxes and when to pay estimated tax?
6. How quickly do you answer questions during the year?

What to send them:

• Access to your bookkeeping software, or the reports they ask for
• Bank and card statements for every business account
• 1099s you received and the W-9s and payments for anyone you paid
• Vehicle mileage or expense records, and receipts for large purchases
• Estimated tax payments you made, with dates
• Your list of questions

This week:

1. Ask your accountant (or find one with the six questions) which software and accounting method to use.
2. Set up your categories with the table above.
3. Put the weekly routine and the monthly close in your calendar.
4. Open a separate tax savings account and decide your percentage with your accountant.

Yes, with bookkeeping software and a weekly routine, and an accountant for setup, tax advice and returns. If the weekly routine keeps slipping, a bookkeeper may cost less than the mistakes.

It depends on your income, state, business structure and deductions, so ask your accountant for a percentage. Remember that as a sole proprietor you pay self-employment tax (a 15.3% rate, according to the IRS, applied to your net earnings from self-employment) on top of income tax, and nobody withholds either one for you. Your accountant works out the exact amounts.

Job costs change with each job: materials, subcontractors, equipment rental, permits. Overhead you pay whether or not you work: insurance, vehicle, phone, software. Keeping them apart shows you whether each job is profitable and whether your prices cover your overhead.

MotionOps is field service software for contractors. Invoicing & Payments tracks who has paid, Field Expense Tracking records each purchase against its job, and MotionOps works with QuickBooks Online, so your books start with fewer gaps.

See all features or compare plans. When you’re ready for your first jobs, book a MotionOps demo.

Contractor Starter Hub: Business Administration Essentials, lesson 2 of 5

• Previous lesson: How to Organize Your Contractor Business Documents: Folders, Names and What to Keep
• Next lesson: Get Paid Faster and Keep Your Projects on Track + Free Template
• Download for this lesson: Accountant Meeting Checklist (PDF)
• All five lessons: Business Administration Essentials