Starting a Construction Business: The Tax and Accounting Setup List for Year One, in the Order It Has to Happen

The first year of a construction business is a setup project running alongside the work, and the setup has an order that the work's urgency tends to scramble. The sequence, with the decision at each step. Step one, the entity: a sole proprietorship (no filing, Schedule C, unlimited liability — the default for a one-person operation testing the market), a single-member LLC (state filing, liability protection, still Schedule C for tax — the standard starting point for most contractors), a multi-member LLC (partnership by default), or a corporation (rare at the start); the entity decision is made with the liability exposure (construction's is high — the LLC's protection matters) and the tax classification in view (the LLC cost guide), with the S corporation election deferred until profit justifies it. Step two, the EIN: obtained from the IRS online (free, immediate) as soon as the entity exists — required for the bank account, payroll, and every registration that follows. Step three, licensing and registration: the state contractor's license (requirements vary — examinations, experience, financial statements, and bonds in many states; some trades licensed separately), local business licenses, and the state's registration for the entity where required — with the license's financial-statement or bonding requirement being the first place a new contractor meets the need for real books. Step four, insurance: general liability (required by nearly every customer and every general contractor), workers' compensation (required by law once there are employees in most states, and often required by general contractors even for owner-only subcontractors), commercial auto for the work vehicles, and the bonding relationship (a surety bond for licensing; performance and payment bonds for jobs that require them — with the surety wanting financial statements from year one). Step five, the bank account and the books: a business bank account and credit card opened on the EIN before the first dollar moves (the commingling that begins with the first job paid into a personal account is the bookkeeping guide's most expensive habit); the accounting system set up with a construction chart of accounts and job costing from the first transaction; the accounting method decided with the tax preparer (cash or completed-contract for most new contractors; percentage-of-completion for the financial statements if bonding); and the monthly close scheduled. Step six, sales and use tax: registration in the home state if the state treats contractors as retailers or if the contractor will sell taxable items (the sales tax guide), and awareness of the use tax obligation on out-of-state and online materials purchases from day one; a consumer-rule-state contractor may need no sales tax registration but does need the use tax habit. Step seven, payroll — before the first employee: registration with the IRS for employment taxes (the EIN covers it; the deposit schedule and Form 941 filing begin with the first payroll), the state's withholding registration, the state unemployment insurance registration (the new-employer rate assigned), workers' compensation coverage in force, the new-hire reporting process, Forms W-4 and I-9 collected at hire, and a payroll system or provider chosen (the payroll cost guide) — the sequence that must be complete before the first paycheck, because retroactive payroll registration is a penalty exercise. Step eight, subcontractors — before the first one is paid: the W-9 condition in the subcontract, the certificate of insurance requirement, the classification question asked (the 1099 guide), and the 1099 process calendared for January. Step nine, estimated taxes: the reserve percentage set and the first-year estimate planned (the contractor estimated-tax guide) — a new business with no prior-year tax has no prior-year safe harbor, so the first year's estimates run on projected profit, and the reserve habit starts with the first draw. Step ten, the first-year deductions and elections: start-up costs (the IRC 195 guide — the pre-opening expenses deductible up to the limit and amortized above it); equipment and vehicles (section 179 and bonus depreciation on the truck, the trailer, and the tools — with the actual-expense method decision for vehicles made in year one); the home office, if the business runs from home (the home office guide); the accounting method election on the first return; and the entity's first return with its opening balance sheet. What new contractors get wrong, in order of expense: mixing personal and business money from the first job (the retrofit is a reconstruction); hiring the first employee before payroll is registered (retroactive registration, penalties, and a workers' compensation gap that is an uninsured injury waiting to happen); paying a subcontractor without a W-9; bidding an out-of-state job without checking the sales tax rule; skipping the reserve and meeting the first tax bill unfunded; choosing the S corporation election in year one on a business not yet profitable enough to justify its payroll and return costs; and buying the truck without deciding the depreciation method. The advisor's role in year one: the entity and method decisions (once), the books' setup (once), the payroll and sales tax registrations (once), and the first return with its elections — the setup engagement that is small against the retrofit, and that the construction-accountant cost guide prices as the first year's investment.

Key takeaways

• The order has dependencies: entity → EIN → licenses and insurance → bank account and books → sales/use tax awareness → payroll registration before the first employee → W-9 process before the first subcontractor → estimated-tax reserve from the first draw → first-year elections on the first return.
• The entity is usually a single-member LLC for liability protection with Schedule C simplicity; the S election waits until profit justifies its payroll and return costs.
• Books and job costing from the first transaction, on a business account, with the method decided alongside the preparer and the surety.
• Payroll registrations must precede the first paycheck (federal, state withholding, unemployment insurance, workers' compensation, new-hire reporting) — retroactive registration is a penalty exercise and a coverage gap.
• No prior-year safe harbor in year one: estimates run on projected profit, and the reserve habit starts immediately.
• First-year elections: start-up cost treatment, section 179 and bonus depreciation on equipment and vehicles (with the vehicle method chosen), the home office, and the accounting method — all on the first return.

The year-one checklist, in order

1. Entity formed (LLC for most). 2. EIN obtained. 3. Contractor's license, local licenses, state registration. 4. General liability, workers' compensation (before employees), commercial auto, surety relationship. 5. Business bank account and card; construction chart of accounts; job costing; method decided; monthly close scheduled. 6. Sales/use tax registration where required; use tax habit regardless. 7. Payroll registrations and system — before the first hire. 8. Subcontract template with W-9 and insurance conditions; classification question. 9. Reserve percentage set; first-year estimates planned. 10. First return: start-up costs, depreciation elections, home office, method election, opening balance sheet. Ten steps, roughly in the first ninety days, and the ones that can't be undone are the ones with "before" in them.

Worked example

Two new HVAC contractors start in April. Contractor one follows the sequence: a single-member LLC formed in week one, EIN the same day, the state HVAC license (with the financial-statement requirement met by a compiled opening balance sheet), general liability bound, a business account opened before the first customer paid, the construction chart and job costing configured, the cash method chosen with the preparer; in July, before hiring a technician, the payroll registrations (federal deposit schedule, state withholding, state unemployment, workers' compensation) are completed and a payroll provider set up; the first subcontractor (a sheet-metal shop) signs a subcontract with the W-9 condition; 30% of every draw goes to the reserve; the truck bought in May is expensed under section 179 with the actual-expense method chosen for its life; the first return carries the start-up cost deduction, the depreciation, a home office for the dispatch room, and the method election. Contractor two starts working in April, deposits the first three jobs into his personal account, hires a helper in June and pays him "as a contractor" with no W-9, bids a job across the state line without checking the sales tax rule, buys a truck on a personal loan, and calls an accountant in the following February. The retrofit: a reconstruction of ten months of commingled transactions, a worker-classification exposure for the helper (an employee by every test), retroactive payroll registration with penalties and a workers' compensation gap, use tax on materials bought online, an estimated-tax penalty for the year, and a truck whose depreciation method is now constrained by how it was booked. His setup cost, done in the wrong order, is several times contractor one's — and the classification exposure is the part that isn't over.

Official sources

Publication 583 explains how a new business chooses its tax year and accounting method, obtains an employer identification number, keeps records, and treats business start-up and organizational costs, which may be partly deducted in the first year and the balance amortized. — Internal Revenue Service, Publication 583, Starting a Business and Keeping Records, https://www.irs.gov/publications/p583

The IRS explains that a U.S.-based business can apply for an Employer Identification Number online, by mail, or by fax, while international applicants can obtain one by phone, mail, or fax. — Internal Revenue Service, Get an employer identification number, https://www.irs.gov/businesses/small-businesses-self-employed/get-an-employer-identification-number

Practitioner note

A construction business's first year is a setup project with dependencies, and every item with 'before' in it — payroll before the first hire, the W-9 before the first subcontractor, the business account before the first deposit — is the one that costs multiples to fix afterward. Our year-one engagement runs the ten steps in order in the first ninety days, makes the entity and method decisions once, and books the elections on the first return, because the contractor who calls in February has already bought the expensive version of every step.

See also: For related guidance, see setting up a contractor's books; and browse every small business tax guide, by situation.

Next step

Fairlight handles new-contractor setup — entity and EIN, books and job costing from day one, payroll and sales tax registrations in sequence, the subcontractor compliance template, the estimated-tax reserve, and the first return with its elections. See pricing or book a call.