Tax compliance is usually not the first thing on a contractor’s mind. However, despite the complications of following state and federal tax laws, it’s in your company’s best interest to do so. Especially in light of unceasing IRS tax audits (reportedly 1.2 million in 2015) and the IRS’ ability to send unpaid tax accounts to private debt collectors. If you are a Colorado contractor, following basic operation rules and regulations can reduce the risk of failing a tax audit (should you be audited), having your tax account turned over to private debt collectors (should you fail to pay required taxes) or receiving hefty fines from local authorities (should you not obtain the required local permits or licenses).
1. Register your Business
Work Permits/Licenses. While various trades are required to obtain licensing from the state of Colorado Department of Regulatory Agencies, general construction contractors are not required to obtain state licensing. Instead, general contractors must apply for project specific work permits/licenses with local authorities. To obtain the required permit/license, contact the building and planning department of the municipality where the job is being done. Additionally, some counties require a county permit as well, which can be obtained from the local county building department. Trades which require licensing such as plumbers and electricians can obtain a state license from the Colorado Department of Regulatory Agencies (DORA) website.
Business Tax Registration. All businesses operating in Colorado must apply for a tax identification number. Online applications can be submitted at www.colorado.gov/pacific/tax.
2. Pay Quarterly Self-Employment Taxes
Unlike employees who automatically have their taxes deducted from their paycheck, a contractor must set aside money to pay taxes. Contractors who will owe more than $1000 in taxes, must pay taxes in quarterly installments. To start, calculate how much your quarterly payment should be (use IRS form 1040-ES) and submit your payments by the four quarterly due dates (typically January 15, April 18, June 15 and September 15). You can make payments online via the federal tax payment system (www.eftps.gov). Don’t forget to also file your annual tax return in April, as you may need to pay additional taxes, or receive a refund if you overestimated your quarterly tax payments.
3. Correctly Collect Sales Tax
Figuring out how to properly collect sales tax depends on the type of contract you use, the materials you buy and who your client is. Depending on these three factors, the contractor must either pay sales tax or collect it from the customer. If collecting sales tax, a contractor must apply for a sales tax license through the Colorado Department of Revenue Division of Taxation website. As a general rule, services are not taxable in Colorado but tangible property is. When determining how much sales tax to collect, a contractor must add both the state tax rate of 2.9 percent and the city tax rate. The city tax rate will be based on your buyer’s location.
|Instances contractor collects
sales-tax from customer
|Instances contractor pays sales-tax|
|When entering into a
Time and Material Contract
|When entering into a Lump Sum Contract|
|Purchasing non-building materials (appliances, window treatments, etc.)||Purchasing building materials or consumables (dry wall, lumber, fuel, acetylene, drop cloths, scaffolding, cement forms and compressors).|
|A contractor does not pay or collect tax on building materials when the customer holds a tax-exempt status, such as charities, churches, government entities or public schools. However, the contractor is still liable for tax on consumables, construction equipment and tools used to perform construction services for the tax-exempt entity.|