Introduction:
This is Part 4 of our 5-part series on transforming your painting and handyman business into a professional, scalable operation. Read Part 1: Tools & Equipment | Read Part 2: Legal Structure & Licensing | Read Part 3: Insurance Coverage
You've got the tools, the legal structure, and the insurance protection. Now it's time to master the financial side of your business. This is where many contractors struggle—they stay busy, work hard, but somehow never seem to get ahead financially.
Financial management often distinguishes contractors who build wealth from those who barely survive. Proper accounting gives you visibility into what's really happening in your business, helps you make informed decisions, ensures tax compliance, and ultimately allows you to keep more of what you earn.
In this guide, we'll walk through setting up accounting systems, choosing the right software, tracking true job profitability, managing cash flow, and understanding your tax obligations. This isn't the most exciting part of running a contracting business, but it's absolutely essential for long-term success.
Important Legal Disclaimer
Please Note: The information provided in this guide is for educational and informational purposes only and should not be considered financial, tax, or accounting advice. Jurisdictions and individual circumstances significantly vary in tax laws, accounting requirements, and financial best practices.
Before making any financial or tax decisions based on this information, you should:
Consult a certified public accountant (CPA) or tax professional who understands contractor businesses and your specific situation.
Work with a bookkeeper or accounting professional to set up your systems properly.
Verify all tax obligations with the IRS and your state tax authority.
Stay current on changing tax laws that may affect your business.
This guide helps you understand what systems you need and what questions to ask, but it cannot replace personalized professional advice from qualified financial and tax professionals.
Why Proper Accounting Matters
Before diving into the how-to, let's understand why this step matters:
Know your true profitability—Many contractors think they're making money but don't realize they're actually losing money on certain types of jobs. Proper accounting reveals which services and clients are profitable.
Make informed decisions. Should you hire an employee? Buy that expensive tool? Raise your rates? You can't answer these questions without accurate financial data.
Manage cash flow—Knowing when money is coming in and going out prevents cash crunches that can cripple your business even when you're technically profitable.
Stay tax compliant—proper records ensure you pay the right amount of taxes—not too much, not too little—and have documentation if audited.
Secure financing—banks and lenders require financial statements. Organized books make it possible to get loans or lines of credit when needed.
Build business value—if you ever want to sell your business, buyers need to see clean financial records proving profitability.
Let's build the systems that make all this possible. Implementing effective accounting practices streamlines your operations and positions your business for future growth. By investing in reliable financial systems and tools, you can enhance transparency and make informed decisions that drive success.
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| notepad, office supplies, and tools for your accountant |
Setting Up Your Accounting Foundation
Separate business and personal finances.
This is rule number one, and it's non-negotiable. Open a dedicated business bank account and run all business income and expenses through it. Never mix personal and business transactions.
Why such an arrangement matters:
Simplifies tax preparation (no sorting through personal expenses to find business ones)
Provides legal protection for LLC owners (mixing finances can pierce the corporate veil)
Gives you clear visibility into business performance
Makes audits much easier if they occur
Looks professional when providing bank statements to lenders or landlords
What you need:
Business checking account—for daily operations, bill payments, and deposits
Business savings account—for setting aside tax money and building emergency reserves
Business credit card—Simplifies expense tracking and builds business credit
Choose a bank that offers business checking with reasonable fees, online banking with excellent mobile apps, integration with accounting software, and local branches if you prefer in-person banking. Additionally, consider the bank's customer service reputation, as having reliable support can be crucial when managing your finances. Researching different options can help you find the best fit for your specific business needs.
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| Women reviewing options for banking accounts best fits your needs |
Choose Your Accounting Method
You'll use either cash-based or accrual-based accounting.
Cash basis accounting records income when you receive payments and expenses when you pay them. This is simpler and shows your actual cash position. Most small contractors use the cash basis because it's straightforward and provides a clear picture of available cash.
Accrual accounting records income when earned (even if not yet paid) and expenses when incurred (even if not yet paid). This provides a more accurate picture of profitability but is more complex. It's required for some larger businesses and those carrying significant inventory.
For most painting and handyman businesses under $25 million in annual revenue (yes, that's the IRS threshold), cash basis accounting is perfectly acceptable and much simpler. Start there unless your CPA advises otherwise.
Set Up Your Chart of Accounts
Your chart of accounts is the organizational structure for all financial transactions. It categorizes every dollar that comes in or goes out.
Income accounts (what you earn):
Interior painting
Exterior painting
Carpentry/trim work
Drywall repair
Plumbing services
Electrical services
General handyman services
Service calls/consultations
Breaking income into categories helps you identify your most profitable services. This, in turn, enables you to make informed decisions about where to focus your marketing efforts and resources. By regularly reviewing your chart of accounts, you can also spot trends and adjust your services to meet changing customer demands.
Cost of Goods Sold (COGS) (direct costs for completing jobs):
Paint and painting supplies
Lumber and building materials
Plumbing materials
Electrical materials
Hardware and fasteners
Subcontractor payments
Operating expenses (costs to run the business):
Vehicle expenses (fuel, maintenance, repairs)
Vehicle insurance
Tools and equipment
Tool repairs and maintenance
General liability insurance
Workers' compensation insurance
Professional liability insurance
Licenses and permits
Office supplies
Marketing and advertising
Website and software subscriptions
Bank fees and merchant services
Professional fees (accounting, legal)
Continuing education and training
Cell phone
Utilities (if you have a shop/office)
Rent (if applicable)
Owner's salary (if S-corp or corporation)
The more detailed your categories, the better you can track where money goes and identify opportunities to reduce costs. By regularly reviewing these expenses, you can make informed decisions that enhance your business's financial health. Moreover, implementing cost-saving strategies can free up resources for growth and innovation.
Choosing Accounting Software
Professional businesses no longer rely on spreadsheets and shoeboxes filled with receipts. Modern accounting software automates much of the work and provides insights impossible to get manually.
QuickBooks Online: The Industry Standard
QuickBooks Online is the most widely used small business accounting software for good reason—it's comprehensive, relatively user-friendly, and most accountants know it well. Its integration with various financial tools and apps further enhances its functionality, making it a versatile choice for businesses of all sizes. Additionally, regular updates ensure that users have access to the latest features and compliance requirements, keeping their financial management up-to-date.
Features:
Income and expense tracking
Invoicing with online payment acceptance
Bank account integration and automatic transaction imports
Job costing and project tracking
Financial reports (profit & loss, balance sheet, cash flow)
Sales tax tracking and filing
Payroll processing (additional fee)
Receipt capture via mobile app
Multi-user access
Pricing:
Simple Start: $30/month—Basic features for very small businesses
Essentials: $60/month - Adds bill management and multiple users
Plus: $90/month—Adds project tracking and inventory (best for most contractors)
Advanced: $200/month—Advanced reporting and analytics for larger businesses
Pros: Comprehensive features, widely supported by accountants, extensive app integrations, strong reporting capabilities.
Cons include a learning curve for non-accountants, the potential for excessive features in very small operations, and the ongoing subscription cost.
FreshBooks: Service Business Focused
FreshBooks is designed specifically for service businesses and is more intuitive than QuickBooks for many users. It offers a user-friendly interface that simplifies invoicing and expense tracking. Additionally, FreshBooks provides robust customer support, making it an excellent choice for entrepreneurs looking to streamline their financial processes.
Features:
Excellent invoicing with professional templates
Time tracking and project management
Expense tracking with receipt capture
Client management and communication
Online payment acceptance
Financial reporting
Mobile apps for iOS and Android
Pricing:
Lite: $15/month—Up to 5 billable clients.
Plus: $30/month—up to 50 billable clients.
Premium: $55/month - Unlimited clients
Pros: Very user-friendly, excellent for client-facing work, outstanding mobile app, strong customer support.
Cons: Less comprehensive than QuickBooks for complex businesses, limited inventory features, fewer integrations with other business tools.
Wave Accounting: Free Option
Wave offers free accounting software with revenue from payment processing and payroll services. While the free option is attractive for startups and small businesses, users should consider their potential growth and whether the limitations might hinder scaling operations. As businesses expand, investing in a more robust solution may become necessary to accommodate increased complexity and functionality needs.
Features:
Income and expense tracking
Invoicing
Receipt scanning
Bank connection and reconciliation
Basic financial reports
Multi-business management
Pricing:
Core accounting: Free
Payment processing: 2.9% + $0.60 per transaction
Payroll: $40/month + $6/employee
Pros: Completely free for basic accounting, surprisingly robust features, suitable for very small businesses watching every expense.
Cons include: fewer features compared to paid options, limited support, an emphasis on promoting paid services, and less sophisticated reporting. Many small business owners may find this platform particularly appealing due to its cost-effectiveness and ease of use. However, as their operations grow, they might need to consider transitioning to more advanced accounting solutions that offer enhanced reporting and support.
Xero: QuickBooks Alternative
Xero competes directly with QuickBooks and is particularly strong for businesses with international clients or complex needs. Its user-friendly interface and strong collaboration features make it a fantastic choice for teams that require seamless communication. Additionally, Xero's robust integration with various third-party applications can further streamline business processes, making it a viable option for a diverse range of industries.
Features:
Comprehensive accounting features
Excellent bank reconciliation
Invoicing and billing
Inventory tracking
Project tracking
Payroll (additional cost)
Multi-currency support
Pricing:
Early: $13/month (basic features, limited transactions)
Growing: $37/month—More features and transactions
Established: $70/month, unlimited everything.
Pros: Strong features at competitive pricing, excellent bank reconciliation, clean interface.
Cons: Fewer integrations than QuickBooks in the US market, less familiar to many accountants.
Making Your Choice
For most painting and handyman businesses, QuickBooks Online Plus ($90/month) or FreshBooks Plus ($30/month) offers the best balance of features and usability.
Choose QuickBooks if you need comprehensive features, plan to grow significantly, or your accountant strongly recommends it. Choose FreshBooks if you want simplicity and excellent invoicing and don't need advanced inventory or reporting. Choose Wave if your budget is extremely tight and you have simple needs.
Tracking Job Costs and Profitability
This is where many contractors fail. They know their total revenue and total expenses, but they don't know which specific jobs or services make money and which lose money.
Implementing Job Costing
Job costing means tracking all income and expenses for each individual project or customer. Modern accounting software makes this straightforward:
Create a customer or project for each job
Assign all income from that job to the customer/project
Assign all expenses for that job to the customer or project (materials, labour hours, subcontractors, etc.).
Review profitability—software calculates profit/loss per job automatically.
Example: You complete a $3,500 interior painting job. Job costing reveals:
Labour: 32 hours at $50/hour = $1,600
Paint and materials: $450
Fuel and vehicle costs: $60
Total costs: $2,110
Gross profit: $1,390 (39.7% margin)
Without job costs, you might think you made $3,500. In reality, you made $1,390 before accounting for overhead (insurance, tools, marketing, etc.). Understanding these figures is crucial for making informed decisions about future projects. By accurately tracking costs and profits, you can identify which types of jobs are most profitable and adjust your business strategies accordingly.
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| Reviewing your estimate with labour and materials |
Calculating Your True Hourly Rate
Many contractors charge by the hour without knowing their true cost per hour. Here's how to calculate it: Start by adding up all your business expenses, including tools, insurance, and taxes. Once you have that total, divide it by the number of hours you realistically expect to work in a year to determine your actual hourly rate.
Total annual business expenses (everything: insurance, tools, vehicle, marketing, your salary, all of it): Example: $85,000
Billable hours per year (realistically, not total hours worked): Example: 1,200 hours (25 hours/week for 48 weeks)
Required hourly rate = Total expenses ÷ Billable hours: $85,000 ÷ 1,200 = $70.83/hour
This is your break-even rate. You need to charge more than this to actually make a profit. If you want a 30% profit margin, divide by 0.7 instead of 1.0: $85,000 ÷ 1,200 ÷ 0.7 = $101.19/hour
Many contractors are shocked to discover they need to charge $75 to $125 per hour just to break even or earn a modest profit.
Understanding Gross Profit vs. Net Profit
Gross profit = Revenue minus direct job costs (COGS: materials, labour, subcontractors)
Net profit = gross profit minus all operating expenses (insurance, marketing, tools, vehicles, and everything else).
You might have 40% gross profit margins but only 10% net profit margins after accounting for overhead. Both numbers matter:
Gross profit tells you if you're pricing individual jobs correctly.
Net profit tells you if your overall business is financially healthy.
Aim for at least 40-50% gross profit margins and 15-25% net profit margins for a healthy contracting business. Maintaining these margins requires careful monitoring of both costs and pricing strategies. Regularly reviewing your expenses and adjusting your pricing accordingly can help ensure your business remains profitable and sustainable in the long run.
Managing Cash Flow
Profitability and cash flow are different. You can be profitable on paper while running out of cash to pay bills or have strong cash flow despite low profitability. Understanding the nuances between these two financial metrics is crucial for maintaining a healthy business. It is essential to monitor both closely to ensure that your operations remain sustainable and can support growth.
The Cash Flow Challenge for Contractors
Contractors face unique cash flow challenges:
You purchase materials prior to receiving payment for completed jobs.
You pay employees weekly/biweekly, but clients pay 30+ days after completion.
Large tool purchases create cash crunches.
Seasonal slowdowns reduce incoming cash
Emergency expenses (vehicle repairs, equipment replacement) happen without warning.
Cash Flow Management Strategies
Maintain a cash reserve—keep 3-6 months of operating expenses in your business savings account. This cushions against slow periods and unexpected expenses.
Require deposits—Collect 25–50% deposits before starting work. This covers initial material costs and demonstrates client commitment.
Invoice promptly—send invoices the same day you complete work, not days or weeks later. Delays in invoicing cause delays in payment.
Offer payment incentives—consider a 2% discount for payment within 10 days. Many clients take advantage of this, improving your cash flow.
Implement late fees—charge 1.5% monthly finance charges on overdue balances (verify this is legal in your jurisdiction and include it in contracts).
Use progress billing—for larger projects, bill at milestones rather than waiting until completion. This keeps cash flowing throughout the project.
Monitor aging receivables—track how long invoices remain unpaid. Follow up systematically: a friendly reminder at 7 days overdue, a firmer notice at 15 days, and phone calls at 30 days.
Control expenses—just because you have cash doesn't mean you should spend it. Maintain discipline about unnecessary purchases.
Plan for taxes— Set aside 25-35% of net income in a separate savings account for quarterly tax payments.
Understanding Your Tax Obligations
Tax compliance is complex for contractors. Here's what you need to know. It's essential to keep detailed records of your income and expenses throughout the year. Additionally, consider consulting a tax professional to ensure you are taking advantage of all available deductions and credits.
Federal Income Tax
As a business owner, you pay federal income tax on your business profits. The rate depends on your total household income and filing status, ranging from 10% to 37%.
If you're a sole proprietor or LLC (taxed as a disregarded entity), business income flows through to your personal return, and you report it on Schedule C.
If you're an S-corporation, you file a separate business return (Form 1120-S) and receive a K-1 showing your share of profits, which you report on your personal return.
Self-Employment Tax
This is the big surprise for new business owners. Self-employment tax covers Social Security and Medicare—the same payroll taxes employees pay, except you pay both the employee and employer portions.
Current rate: 15.3% on the first $160,200 of net earnings (2023), then 2.9% on earnings above that.
This is in addition to income tax. If you net $75,000, you'll pay about $11,475 in self-employment tax plus regular income tax.
S-corporation advantage: If taxed as an S-corp, you only pay payroll taxes on your salary, not on distributions. This is the primary tax advantage of electing S-corp status.
State Income Tax
Most states charge income tax on business profits. Rates and rules vary widely—from zero in states like Texas, Florida, and Washington to over 10% in states like California and New York.
Sales Tax
Sales tax rules for contractors are incredibly complex and vary by state. Some states impose a sales tax on materials but not on labour. Some tax the entire job. Some exempt certain types of work. Some states don't have sales tax at all.
You must understand your state's requirements:
Do you need to collect sales tax from clients?
Can you buy materials tax-free for resale?
How and when do you remit collected tax?
Failure to collect and remit required sales tax creates personal liability—states can pursue you personally for unpaid sales tax even if you have an LLC.
Quarterly Estimated Taxes
The IRS requires quarterly estimated tax payments if you expect to owe more than $1,000 annually. Payments are due:
April 15 (for Q1: Jan-Mar income)
June 15 (for Q2: Apr-May income)
September 15 (for Q3: Jun-Aug income)
January 15 (for Q4: Sep-Dec income)
Estimate your total annual tax liability and divide by four. Pay each quarter to avoid underpayment penalties.
Maximizing Deductions
Proper recordkeeping allows you to deduct legitimate business expenses, reducing your tax bill. Common deductions include:
Vehicle expenses: You can either deduct actual vehicle expenses such as fuel, maintenance, insurance, and depreciation, or you can use the standard mileage rate, which is set at 65.5 cents per mile in 2023. Track all business miles meticulously.
Tools and equipment—Deduct in the year purchased (Section 179 deduction up to $1,160,000) or depreciate over several years.
Materials and supplies—fully deductible as COGS.
Insurance—All business insurance premiums are fully deductible.
Home office—If you have a dedicated space used exclusively for business, deduct a portion of rent/mortgage, utilities, and maintenance. This deduction is heavily scrutinized, so document carefully.
Marketing and advertising—website costs, vehicle lettering, business cards, and online advertising—are all deductible.
Professional development—training courses, industry publications, association dues, and certifications.
Business meals—50% deductible when discussing business (document who, where, and what was discussed).
Cell phone: Business use percentage is deductible.
Professional fees—accounting, legal, and other professional services.
Working With a Tax Professional
Hiring a CPA or enrolled agent who specializes in small businesses typically costs $500 to $2,000 for annual tax preparation, but the value far exceeds the cost:
They identify deductions you'd miss.
They ensure compliance, reducing audit risk.
They structure transactions for maximum tax efficiency.
They handle IRS correspondence if issues arise.
They advise on major decisions (equipment purchases, hiring, business structure changes).
For your first year in business, especially, professional tax help is essential to setting up proper systems and understanding your obligations.
Financial Reporting and Analysis
Your accounting software generates reports that tell you how your business is performing. The most important reports...include the income statement, balance sheet, and cash flow statement. These documents provide insights into profitability, financial position, and cash management, allowing you to make informed decisions that drive growth and sustainability.
Profit & Loss Statement (Income Statement)
Shows revenue, expenses, and profit over a specific period (month, quarter, year). Review this monthly to understand profitability trends.
Key things to watch:
Are revenues growing or declining?
Are expense categories increasing faster than revenue?
What's your gross profit margin? What is your net profit margin?
Are there unusual expenses that need investigation?
Balance Sheet
The balance sheet displays your assets, liabilities, and equity at a specific point in time. This matters less for service businesses than product businesses but still provides useful information about business health.
Cash Flow Statement
Shows actual cash movement in and out of your business. You can be profitable but cash-poor, or unprofitable but cash-rich temporarily. Understanding cash flow prevents surprises.
Accounts Receivable Aging Report
Shows how much clients owe you and how long invoices have been outstanding. This helps you stay on top of collections and identify problem clients who don't pay promptly.
What's Next?
You now have the knowledge to set up proper accounting systems, track profitability, manage cash flow, and handle tax obligations. These systems provide the financial foundation for sustainable business growth.
In Part 5 of this series—the final installment—we'll cover invoicing and billing best practices, payment processing options, customer relationship management, and strategies for growing your business. We'll tie together everything from Parts 1-4 into an actionable implementation plan that takes your painting and handyman business from where it is now to where you want it to be.
Final Financial Reminder
Tax laws, accounting requirements, and financial best practices vary significantly by jurisdiction and individual circumstances. Before implementing any financial or tax strategies:
Consult a CPA or tax professional who understands contractor businesses.
Work with a bookkeeper to set up systems properly
Verify all tax obligations with federal and state authorities
Stay current on changing tax laws that affect your business.
Series Navigation:
You are currently in Part 4: Accounting, Financial Systems & Tax Planning.
Part 5: Invoicing, Billing, Payments & Growth Strategies (Coming next—the final installment!)
What accounting challenges have you faced in your contracting business? Share your questions in the comments below!
Regards,
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About the Author – JFB Handyman
JFB Painting and Handyman Services has been proudly serving homeowners since 2018, providing reliable, detail-focused home maintenance, repairs, and improvement services. With years of hands-on experience solving real foundation, soil, drainage, and structural issues, JFB Handyman brings practical knowledge to every project and every article.
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