Starting a Construction Business: Tax Registration, Licensing, and First-Year Accounting Checklist

You know how to build. Now you need to know how to set up the business so the IRS, the state licensing board, and your insurance carrier are all satisfied before the first shovel hits dirt. Most new contractors skip steps in the first year because the work is coming in and the paperwork feels like it can wait. It can’t. An unlicensed contractor faces fines and contract voidability in most states. An uninsured one can’t get on a job site. And a contractor who doesn’t set up proper accounting from day one spends the next three years reconstructing records for a tax return that’s already late. This guide covers the tax, licensing, and accounting setup in the order you should actually do it, from entity formation through your first quarterly estimated payment.

Step 1: Choose your entity structure

This decision affects everything downstream (how you file taxes, how much you pay in self-employment tax, how much liability protection you carry, and what your balance sheet looks like to a surety), so get it right before you register anything. The full analysis is in the entity structure guide, but the short version for a new contractor:

Sole proprietorship is the default. If you start doing business without forming an entity, you’re a sole proprietor. You report business income on Schedule C, pay self-employment tax on the full net profit, and your personal assets are exposed to business liabilities. It’s the simplest setup and the worst for liability protection.

Single-member LLC gives you liability protection (assuming you maintain the corporate formalities) with the same tax treatment as a sole proprietorship. The IRS ignores the LLC for tax purposes unless you elect otherwise. This is the right starting point for most new contractors because it separates personal assets from business liabilities without adding tax complexity.

S-Corp election (via Form 2553) can save significant self-employment tax once your profit exceeds roughly $60,000 to $80,000, because only the reasonable salary you pay yourself is subject to FICA, not the pass-through profit. But an S-Corp requires payroll, a separate tax return (Form 1120-S), and reasonable compensation analysis. For a contractor in the first year with unpredictable income, the LLC is usually the right structure with a plan to elect S-Corp status once the business stabilizes.

Don’t form a C-Corp unless you have a specific reason (a bonding company that requires it, venture-backed growth plans, or retained earnings strategy). The double taxation at the corporate and shareholder level makes it a poor fit for most contractors.

Step 2: Get your EIN and register with the state

An Employer Identification Number is your business’s Social Security number. You need it to open a business bank account, file tax returns, hire employees, and get insurance. Apply online at IRS.gov and you’ll have it in minutes.

State registrations vary, but most contractors need at least three:

Contractor’s license. Roughly 35 states require a general contractor’s license, and nearly all states license at least some specialty trades (electrical, plumbing, HVAC, roofing). Requirements vary wildly: some states want a trade exam and proof of experience, others want a bond and financial statement, and a few (like New York, outside NYC) regulate at the local level rather than the state level. Licensing fees range from a few hundred dollars in lower-cost states to over $500 in states like California (the CSLB application fee alone is $450, plus the exam fee). Many states also require a surety bond for licensing: $10,000 to $25,000 in bond value is typical for a new GC, and the premium on a surety bond is usually 1% to 3% of the bond amount ($100 to $750 for a $25,000 bond, depending on your credit). Check your state’s licensing board before you take a job. Operating without a required license can void contracts, prevent you from collecting payment, and trigger fines ranging from $500 to $10,000 per violation.

Sales tax registration. If your state imposes sales tax on construction materials or certain services (and most do, though the rules are wildly inconsistent), you’ll need a sales tax permit. The multi-state tax guide covers how sales tax applies to construction, including the difference between states that tax materials at purchase and states that tax the installed price to the customer.

Unemployment insurance. If you have or plan to have employees (including yourself if you’re an S-Corp), register with your state’s unemployment agency. Rates for new employers start at a default rate (often 2.7% to 3.4% of taxable wages) and adjust based on your claims history over time. Construction employers typically face higher rates because the industry has higher layoff frequency.

Step 3: Open a business bank account and set up bookkeeping

Commingling personal and business funds is the fastest way to lose your LLC’s liability protection and the surest way to create a tax filing nightmare. Open a separate business checking account and run every business transaction through it. Get a business credit card for materials, fuel, and job-site expenses.

Set up bookkeeping software that supports job costing from the start. You need to track income and expenses by project, not just in the aggregate, because job costing is required for the percentage-of-completion method and practically necessary for knowing whether each job made money. QuickBooks Online (Contractor edition), Foundation Software, and Sage 100 Contractor are the most common platforms. For a new contractor doing under $2 million in revenue, QuickBooks Online with a proper chart of accounts and job-costing classes is usually sufficient.

Your chart of accounts should include at minimum:

• Revenue accounts by type (contracts, change orders, T&M work)
• Cost of goods sold broken into labor, materials, subcontractors, equipment, and other direct costs
• Overhead accounts for insurance, office expenses, vehicle costs, professional fees, and the home office
• A retainage receivable account, separate from standard accounts receivable

Step 4: Get insurance before you start work

No general contractor will let you on a job site without a certificate of insurance, and most states require workers’ comp if you have even one employee. The insurance and bonding guide covers the tax treatment of every premium. Here’s the minimum coverage for a new contractor:

General liability protects against third-party injury and property damage claims. Minimum limits of $1,000,000 per occurrence and $2,000,000 aggregate are standard. Premiums for a new contractor without a claims history run anywhere from $2,000 to $15,000 per year depending on the trade, revenue, and state. Every dollar is deductible under IRC 162.

Workers’ compensation is required in every state except Texas (which makes it optional) if you have employees. Even if you’re a sole proprietor with no employees, some states require you to carry coverage on yourself, and most GCs require a certificate from every sub. Premiums are based on payroll by classification code. The first year’s premium is estimated; the carrier audits actual payroll after the policy year and bills the difference.

Commercial auto covers your trucks, vans, and trailers. Personal auto policies exclude business use, so you need a commercial policy as soon as the vehicle is used for work. Premiums for a single work truck typically run $1,500 to $4,000 per year. A fleet of three to five vehicles pushes $5,000 to $12,000 per year, depending on driver records, vehicle age, and the state.

Inland marine covers tools, equipment, and materials in transit and on site. If your truck full of tools gets stolen from a job site, homeowner’s insurance doesn’t cover it and commercial auto only covers what’s in the vehicle during a covered accident. Inland marine is the policy that fills this gap. Premiums are based on the value of the covered property, typically 1% to 3% of the total insured value per year. A contractor with $50,000 in tools and equipment might pay $500 to $1,500 for inland marine coverage.

Step 5: Understand startup costs vs. operating expenses

The IRS draws a line between expenses you incur before the business starts operating and expenses you incur after. The distinction matters because they’re deducted differently.

Startup costs under IRC 195 are expenses incurred before you open for business: licensing fees, pre-opening advertising, market research, training courses, travel to meet potential clients or suppliers, and the cost of investigating the business. You can deduct up to $5,000 in startup costs in the first year (reduced dollar-for-dollar when total startup costs exceed $50,000), with any remainder amortized over 180 months (15 years) starting in the month the business begins.

Operating expenses are everything after the business starts. The business “starts” when you’re ready and available to take on work, not when you land the first contract. A contractor who gets licensed in March, buys insurance in April, and starts bidding jobs in May has a business that started in May (or arguably April). Expenses from May forward are ordinary business deductions under IRC 162.

Organization costs under IRC 248 (for corporations) or IRC 709 (for partnerships and LLCs) are a separate category. These cover the legal and filing fees to create the entity: articles of organization, operating agreement drafting, state filing fees. The same $5,000/$50,000 rule applies, separate from startup costs.

Expense	Category	How it’s deducted
Contractor licensing exam and fees	Startup cost	$5,000 first year, remainder over 15 years
LLC formation filing fee	Organization cost	$5,000 first year, remainder over 15 years
First general liability premium	Operating expense (if business has started)	Deducted when paid under IRC 162
Pre-opening advertising (website, truck lettering)	Startup cost	$5,000 first year, remainder over 15 years
Tools purchased after business starts	Operating expense / depreciable asset	Deducted or depreciated under Section 179 / MACRS
CPA fees for setting up the books	Organization cost or startup cost	$5,000 first year, remainder over 15 years

Step 6: Make your first estimated tax payment

If you expect to owe $1,000 or more in federal tax for the year, you’re required to make quarterly estimated payments. The estimated tax guide covers the full calculation, safe harbor rules, and seasonal adjustment methods. For a new contractor in the first year, there’s no prior-year return to base the safe harbor on, so you’ll need to estimate current-year income and pay 90% of the expected tax to avoid the underpayment penalty.

A practical approach for year one: estimate conservatively, pay 25% of your expected annual tax each quarter, and adjust as the year progresses. If you started mid-year, the first payment covers income from the start date through the next quarterly deadline. Overpayments get refunded or applied to next year.

Don’t forget state estimated taxes. Most states follow the same quarterly schedule and the same $1,000 threshold.

Step 7: Plan for the first tax return

Your first return is due by April 15 of the following year (March 15 for S-Corps and partnerships, with a K-1 that flows to your personal return by April 15). Keep these first-year items organized:

• All startup and organization costs, dated and categorized
• Revenue by job (even if it’s just two or three projects)
• Direct costs by job (materials, labor, subs)
• Every receipt for tools, equipment, and supplies (for Section 179 and depreciation elections)
• Mileage log from day one (the home office guide explains why this matters)
• Insurance certificates and premium payments
• Estimated tax payment confirmations

If you’ve kept the books current on a monthly basis, the return is straightforward. If you haven’t, you’re reconstructing a year of transactions from bank statements and receipts, which is expensive in CPA fees and often leaves deductions on the table.

What should I do next?

Get the entity formed, the EIN issued, and the bank account open before you take the first dollar of revenue. Get insurance before you set foot on a job site. Set up job costing from the start, not after the first year when you realize the books are a mess. And make your estimated tax payments on time. Everything else is optimization.

• The entity structure guide walks through the LLC vs. S-Corp decision in detail.
• The insurance and bonding guide covers what coverage you need and when each premium is deductible.
• The job costing guide shows how to set up project tracking that works for both tax compliance and profitability analysis.
• If you’re buying equipment in year one, the depreciation guide covers Section 179 and bonus depreciation.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.