The contractor & trades tax strategy library
The biggest planning decisions for a trade business come in three places: payroll structure, retirement savings, and the way you buy trucks and tools.
Best forShops paying crew on 1099sPrimary leverRisk reduction
PayrollGet worker classification right
The IRS applies the common-law control test. Many states use the stricter ABC test, under which a worker doing the same work as your business is presumed to be an employee. Subcontractors with their own licensed business, insurance, and multiple customers are usually treated as contractors federally, but in ABC states they may also need to fit a state exception, such as California's for licensed construction subs. A helper who rides in your truck isn't.
Best forProfitable shops with 3–50 employeesPrimary leverDeduction & recruiting
RetirementSafe harbor 401(k) for owner and crew
A safe harbor match, commonly 4% of pay, satisfies the ADP/ACP tests automatically, so the owner can make the maximum deferral. A profit-sharing layer can bring the total to $72,000, but it still has to pass its own nondiscrimination testing, which usually means a minimum contribution for staff. SECURE 2.0 startup credits can offset most plan costs in the first three years.
Best forNewer or smaller shopsPrimary leverDeduction
RetirementSIMPLE IRA as a low-cost starter plan
SIMPLE IRAs cost little to run, but the lower limit caps owner savings. Many contractors start with a SIMPLE and move to a safe harbor 401(k) once profits grow. Since 2024 that change can happen mid-year if the safe harbor 401(k) starts the day after the SIMPLE ends, with that year's deferral limits prorated. A switch to any other plan must still take effect on January 1.
Best forAny shop buying vehicles or equipmentPrimary leverAccelerated depreciation
EquipmentSection 179 and bonus on trucks and tools
Vehicles over 6,000 lbs GVWR avoid the luxury auto caps. Cargo vans with no seating behind the driver and pickups with a 6-foot-plus bed are generally fully eligible. SUVs face a reduced Section 179 cap but can still use bonus depreciation.
Best forOwners netting roughly $80k+Primary leverPayroll tax savings
EntityS corp with a defensible salary
Distributions aren't subject to the 15.3% self-employment tax, but the IRS expects a market wage first. Support the salary with industry pay data for your role and hours.
Best forAny employer paying FLSA overtimePrimary leverRecruiting & compliance
ComplianceOvertime deduction reporting for your crew
From 2025 through 2028, workers may deduct up to $12,500 of the overtime premium, or $25,000 on a joint return. Your payroll system needs to separate the FLSA-required half-time premium so employees can claim it. Extra premiums under state law or union agreements are not part of that amount.
Best forContractors under about $32M average gross receiptsPrimary leverIncome deferral
AccountingSmall contractor accounting methods
Small contractors can often avoid the percentage-of-completion method on contracts expected to finish within two years. Residential construction contracts, including those for apartment buildings, entered into in tax years beginning after July 4, 2025 are exempt at any size or length. Changing methods requires Form 3115, and the deferral can be meaningful in a growth year.
Best forTrade businesses working in ConnecticutPrimary leverState tax & compliance
ConnecticutPlan around Connecticut's contractor rules
For pass-through owners, electing Section 179 instead of bonus on a truck leaves 20% of the cost deductible on the Connecticut return in year one, compared with nothing under bonus. S corps and partnerships can weigh the optional 6.99% pass-through entity tax, which gives owners an 87.5% credit, against the federal SALT cap. Commercial and rental jobs should be priced with the service portion taxable at 6.35%.