California Contractor Taxes: What Contractors Need To Know

You need to know so many different things to be a successful licensed contractor in California.

From passing the CSLB Law and Business exam to knowing how to register as a business in California, to knowing the ins and outs of your local zoning and business codes — there’s a billion areas of knowledge that require a contractor’s understanding and expertise.

In a job that’s so demanding of your time and mental energy, the very thought of having to learn about taxes can make a contractor’s head spin. We know it better than anyone – we became contractors because we’re intuitive thinkers! And what’s more counterintuitive than the mind-bending maze that is the tax code in the U.S.?

With that in mind, here are the very basics of what taxes you’ll need to be aware of as a construction contractor in California. As always Y.M.M.V (your mileage may vary), so always take this advice as general advice – then do your own diligence to make sure you’ve got your t’s crossed and i’s dotted.

Without further ado, here’s a bird’s eye view of what you need to know about taxes as a California contractor.

What Do Contractors Pay In Federal Taxes?

First and foremost, let’s tackle federal taxes. What a California construction contractor owes to Uncle Sam is, frankly, extremely complex and can involve multiple different companies, contractors, subcontractors, and employees.

For example, if you’re a roofer who works solo, you may only need to pay the self-employment tax. However, if you’re a general contractor, your tax burden is usually going to be much greater, as you’re often paying for employees, subcontractors, and so on.

With all that said, here are the main areas of taxation from the Feds.

Contractor Federal Tax Compliance

In order to stay compliant with federal taxes you need to stay in line with the following advice:

Contractor Federal Tax Deductions and Credits

Contractors can reduce their taxable income by claiming various deductions such as business expenses, home office deductions, and vehicle expenses. You are probably already doing something like this. These are the most basic ways to save on your taxes.

Contractors may also qualify for tax credits and deductions. This is where having a tax expert can really come in handy, as they’ll help you identify and take advantage of these tax breaks.

Here’s a couple examples of common deductions in the construction industry, but there are literally dozens of these. Again – hire a tax professional to find more deductions!

California Taxes Contractors Need To Know

Now onto what you can expect in California in particular. One thing we love is property taxes (the highest in the nation), but we’re actually not even in the top 5 in terms of sales taxes…somehow.

Here’s the ins and outs of California’s robust (and exhausting) tax schedule.

Sales and Use Taxes For California Contractors

Sales and use tax laws in California are particularly nuanced for construction contractors (what else is new?). The truth is what a contractor pays in taxes highly depends on the nature of the construction work and the size and scope of the business.

However, there are some key areas that you can expect to be hit by taxes, the main ones being Sales and Use Taxes. We’ll also cover some of the key areas around these taxes – notably the seller’s permit that is required whenever a contractor installs a fixture.

This is all coming from the California Department of Tax and Fee Administration – the authority responsible for contractor taxation:

Employment Taxes For California Contractors

Visit the EDD website for more information on UI and ETT.

Tax Planning Considerations for 2023

Somehow, April is right around the corner. Here’s some things to focus on as you prepare your taxes for the coming tax season.

When In Doubt…Hire It Out

You’re a contractor – you know all about hiring out work to people who have the specialized, expert knowledge to get the job done.

You can apply that same logic to your financial life, too! Accountants are experts in the world of taxes, and can help you navigate the maddening world of taxes, exceptions, credits, exemptions, and so on!

We recommend reaching out to someone in your area who specializes in construction law – there will be one in most major cities or towns, or you can probably find recommendations from your colleagues and local network. These “Class T” (ha ha) contractor tax specialists can help save you money and time as you subcontract out this part of your job to people who know better.

Either way, make sure you have a deep, full understanding of everything you’re responsible for as a contractor – from materials to employment tax.


KMCO – Tax Planning For Construction Contractors (we can’t recommend this article enough!)
CDTFA – California Department of Tax and Fee Administration
EDD – Payroll Taxes – Employment Development Department
IRS – Credit for builders of energy-efficient homes