Teamwork is critical to building a successful contracting business. Successful entrepreneurs engage a brain trust of employees, hire advisors who coach them, and they develop strategic partnerships with individuals and businesses.
Supporting Teams Your Business Needs to Succeed
Teamwork is critical to building a successful contracting business. Successful entrepreneurs engage a brain trust of employees, hire advisors who coach them, and they develop strategic partnerships with individuals and businesses.
Teamwork is critical to building a successful contracting business. Successful entrepreneurs engage a brain trust of employees, hire advisors who coach them, and they develop strategic partnerships with individuals and businesses.
Avoid These 3 Pitfalls When Starting a Contracting Business
Starting a contracting business can be quite tricky. I find that new contractors have difficulty articulating their business proposition and that’s certainly a recipe for disaster. At the end of the day, our job as entrepreneurs is not just helping customers understand what we’re providing but more importantly helping them see why they should choose you over the next guy. If they don’t easily understand your services and feel a strong urge to sign your contract, you’ll have a steep uphill sales climb at best.
So, should you abandon that contracting business idea? No!! Contracting, if done correctly, can be a lucrative business for entrepreneurs – it just needs to be done correctly.
Here are three major pitfalls to avoid as you plan your contracting business.
Avoid Pitfall Number 1
Not developing your specialty
As a mountain biker, I’ve noticed that wherever I aim my tire, there I go. For example, if I stare at that large rock, right in front of me, no doubt, my wheel is gonna hit it. But I had no interest in hitting that rock. I wanted to stay on the single track.
Contracting businesses can often benefit from the same strategy. Promoting yourself as a remodeler, keeps you unfocused and not sure what direction to take. Also, from a marketing perspective, telling someone that you’re a remodeler may sound good, but it really provides very little information and only leaves them confused as to who you are as a company.
What’s more effective is figuring out what aspect of remodeling you do the best. Start with that as your title and then following up with a sentence or two that provides a vivid description of tangible services that can serve a real need for someone.
For example, “Interior Remodeler – a contractor focused on helping homeowners bring new life to their home, inside and out.” Yes, the second version is longer and you shouldn’t blurt it out anytime anyone asks your name, but you should be prepared to share it when you’re asked to describe it.
The simple truth is the title “remodeler” is virtually meaningless and should rarely be used without any additional explanation. Decide on a specialty, develop your subtitle and use it.
Avoid Pitfall Number 2
Providing only services without a product
The upside of a service business is that they require little capital expenditure and barriers to entry are low. After all, if you’re essentially selling your craft, it’s fairly easy to develop a website, hang your shingle, and find yourself in business. The downside for service businesses though is that they’re often quite labor intensive. Contracting businesses relying exclusively on services can find themselves frustrated because they are:
- Exhausted by having to physically work (or bring in other labor to work) to generate revenue
- Revenue limited by their own bandwidth and the amount of services they can provide
- Having difficulty defining and distinguishing their offerings
- Having trouble selling their services, because it is not understood how you differ from other companies selling the exact same thing.
A great option for many contractors businesses is to develop tangible products that can not only complement and expand service offerings, but also help them better serve their clients and generate passive revenue. Typical product offerings could include webinars, e-books or other publications, training seminars or other instructional materials and templates or guides.
Instead of focusing exclusively on contracting, think early on about what complementary products you might be able to offer.
Avoid Pitfall Number 3
Allowing scope creep
As a hungry, new entrepreneur, you may fall victim to scope creep. If you can smell the opportunity to win some new business, it’s tempting to push your scope of services to pursue the contracts. But don’t do that.
A key element of scoping your services is deciding what is OUT of scope for you. This out of scope list truly sets the boundaries of your contracting services and helps you better define your business. Write an in scope/out of scope list that clearly identifies what you do and what you don’t do and stick to it.
Developing a contracting business can sound simple, but it’s really anything but. Performing the contracting work may actually be the easy part. Appropriately defining and scoping your business may prove to be trickier than you think. Don’t make the mistake of underestimating the importance of establishing a strong foundation.
You know your books are a mess when….
Every small business owner has the best intentions from the beginning, but heavy responsibilities and busy schedules often lead to important tasks falling to the backburner. One area that is often overlooked is the company’s financial tracking. You may have to pay monthly or annual fees for high-quality accounting software programs. However, unless you use it correctly, it will be ineffective. This can lead to a lot of confusion and mistakes. It’s tempting to just ignore the problem, but I assure you that it won’t just go away. Any issues or mistakes with your bookkeeping will grow and spread until it’s a tangled mess. If your books are a mess, you’re putting unnecessary stress on yourself and your business.
So what does it mean, if your books are a mess? Here are some common signs:
- You don’t know how much you’re spending each month.
- You have a wallet (or file folder) full of receipts or you don’t have enough receipts attached for proof.
- You’re not sure if your business is profitable.
- You’re afraid to log into your bank’s online system.
- You have leftover funds in your account every month.
- Your monthly reconciliations aren’t happening
- You never know the exact standing of your bank accounts
From an accountant’s point of view, your books are a mess when:
- There is no clear distinction between business and business owner transactions. Business owners have used personal funds for business expenses or business assets for personal purposes.
- The original documents of the transaction are obviously missing on the bank statement. If an accountant cannot clearly distinguish sales revenue from loan/capital revenue, or cannot distinguish between equipment payments and inventory payments, it is almost impossible to accurately determine your profits and tax liabilities.
- The books/records you provide to the accountant cannot be reconciled. For example, the bank statement doesn’t reconcile with the cash at the bank account, your physical inventory does not reconcile with your Inventory account, the money owed to you from your customer’s list does not reconcile with the accounts receivable account, the list of money you owe to suppliers does not reconcile with the accounts payable account or your list of physical assets does not reconcile with your asset register.
HOW TO CLEAN UP THOSE MESSY BOOKS?
1. Stop Any Further Damage and determine if you have a problem
Therefore, the first step is to prevent damage from occurring from now on. This means that all new, incoming source documents will be routed through a reliable bookkeeping system.
Before a formal inspection of a book, it must be determined whether there is a problem. Often, companies with very messy or incomplete accounting records know they have problems that need to be resolved. However, companies with smaller differences or less obvious problems may not have the vision to understand the root cause and the expertise to solve the root problem.
These common signs can signal accounting record issues:
- General ledger errors
- Negative cash or credit balances
- Asset overestimation
- Inconsistent fixed asset depreciation
- Restricted payment terms from suppliers
- Static inventory levels
- Unaccounted for interest on cash and credit accounts
- Muddled business loan records
- Missing retained earnings
- Cash discrepancies
- Unauthorized withdrawals
- Excessive business expenses
- Bank fees and penalties
- Customer and vendor invoice inconsistencies
If there are any of the above red flags, the company should clean up its accounting records.
2. Separate Your Personal and Business Account
Research shows that most start-ups and small businesses fail because they do not separate personal accounts from business accounts. This means that you will have to go through messy business books to find the correct amounts before filing tax returns and debt repayment. By separating personal and business accounts, you will have a clear picture of your financial situation and cash flow, which means you will be able to record all sources of income and expenditure.
There are most two important reasons that you need to separate your personal and business account:
- It’s much easier to ensure that you record all business income and expenses, and spend less time figuring out whether the expenses are business expenses or personal expenses
- If you choose to transition to a cloud-based accounting system (such as the online version of QuickBooks), you can save a lot of time without having to process too many transactions.
3. Track Every Expense Incurred
To clean up the accounting books, you need to establish an appropriate accounting system. Then, you will need to create a chart of accounts in which all transactions can be recorded correctly.
How does this help you?
When you label and classify all of your expenses it helps you avoid unnecessary income taxes. It also saves you money by giving your CPA tax ready booksl. You’re not paying them CPA fees to clean up your books so they can prepare your tax return.
4. Reconcile Your Business Books
Probably the most important step in getting your books in order is reconciling your bank statements.
You need to reconcile your business accounts with the actual expenditures and expenses to get the business on track.
Bank reconciliation requires disciplinary action. Many business owners get lost here because they make things pile up. Reconciling your transactions is like pulling weeds in your garden. If you spend a little time every day, it’s no big deal. But if you let them pile up, now you are really a mess.
Try scheduling an appointment with yourself once a month to reconcile your bank statements and set your budget for the coming month. You could also check in weekly to code your transactions (making your monthly reconciliation that much faster).
5. Get help when you can
Overwhelmed? Yes, keeping your books in line can be time-consuming. But it’s a necessary part of business ownership.
Your best bet is to find someone who can set up a system for you, reconcile your accounts regularly, and send you financial reports. The key is that you are prioritizing to fix your mess. A financial mess will choke your business and keep it from growing!
Not knowing how to handle your finances is not a crime. But not filing your taxes is. And besides, wouldn’t you feel a lot less stressed if you had all of this behind you?
Many small business owners like the comfort and safety of having professionals, both for accounting and tax planning. It may seem more expensive, but the impact of better long-term planning may far outweigh the cost. You can save time, effort, and even money, since paying a professional will ensure that you avoid losses, fines, penalties, and additional expenses in the long term.
Excel Consulting Solutions offers a full range of bookkeeping services and promises that in 2-3 weeks, we can clean up a whole tax year for you, so you are prepared for tax season. We believe knowing your company’s financial health is the key to maintaining control of your business.
Give us a call today 970.888.0349
Steps to Hiring your First Employee
Congratulations on your hiring your first employee. This is a great opportunity for your business to grow and for you to step more into the ownership role. It’s a big responsibility having employees. You have to pay them on time. They depend on you for a salary. They may have families. This is not a decision entered into lightly. There are also rules and regulations you have to follow on the state and federal levels.
The following is information you need to know about how to get set up to have employees in the State of Colorado.
MINIMUM WAGE
The minimum wage in Colorado for 2024 is $ 14.42 hour.
Step 1 – Register as an Employer
You will need to first get a Federal Employer Identification Number (FEIN) – Form SS-4 from the Internal Revenue Service (IRS) if they do not already have one. If you have been operating as a single member LLC or a Sole Proprietor, you may already have this number.
You will also need a Withholding Account Number from the Colorado Department of Revenue and Unemployment Account Number from the Colorado Department of Labor and Employment.
Step 2 – Employee Eligibility Verification
Each new employee will need to fill out the I-9 Employment Eligibility Verification Form from U.S. Citizenship and Immigration Services, to confirm citizenship and eligibility to work in the U.S. The employee must complete Section 1 by their first day of work, and the employer will complete Section 2 by the end of the third business day after the employee starts.
The I-9 form is not submitted, but by law, employers are required to keep the form on file for three years after the date of hire or one year after the employee’s termination, whichever is later.
Step 3 – Employee Withholding Allowance Certificate
Each employee will provide their employer with a signed Withholding Allowance Certificate (Form W-4) on the date of employment. The W-4 form determines how much federal income tax will be withheld from the employee’s paycheck. You do not need to submit the Form W-4 to the IRS, but you should make an employee folder and keep a copy on file.
See IRS’s Publication 15 – Employer Tax Guide for more information on federal withholding.
Step 4 – New Hire Reporting
When you hire a new employee, or re-hire a previous employee, the State of Colorado requires employers to report them within 20 days of hiring to the Colorado State Directory of New Hires.
Effective July 2021, Colorado House Bill 21-1220 requires employers to report Independent Contractors, also known as self-employed or contract employees, as new hires, if they provided their Social Security Number for tax purposes. If they provided a Federal tax ID (FEIN), you do not need to report these employees as new hires.
You will need to gather the employee’s name, address, Social Security Number, date of birth, and the employee’s start date or the first day the employee begins work.
Employer information includes Federal Employer Identification Number, employer name, address, and contact phone number. You then submit the new hire reporting form online with the Colorado State Directory of New Hires.
The new hire information is required through the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA). This information is recorded in the State Directory of New Hires and the National Directory of New Hires (NDNH) to locate parents and non-custodial parents who owe child support.
Step 5 – Payroll
You will need to determine a frequency of pay. You can set payday as weekly, starting the following Friday. Bi-Monthly, on the 1st and 15th of the month, or monthly. You can not exceed 30 days to pay an employee. Once your pay period is established, you can not change or miss a pay period without informing your employees well in advance.
When , payroll taxes will need to be paid. Payroll taxes include:
Federal Income Tax Withholding
Employers withhold money from each employee’s paycheck to pay the employee’s federal income taxes based on the information provided in their W-4. The employer does not pay any withholding tax. It is a tax that is collected by the employer and the employer remits the withheld taxes to the state or IRS.
File federal income tax withholding reports using Form W-2, Wage, and Tax Statement with the IRS. The IRS Form 941 is due quarterly, and IRS Form 940 is filed annually to report any unemployment taxes due.
State Income Tax Withholding
Similar to the federal income tax withholding, taxes are withheld from an employee’s paycheck for state income taxes.
Social Security & Medicare
Social Security and Medicare taxes are paid under the Federal Insurance Contributions Act (FICA). The employer pays half of FICA, and the other half is paid from the employee’s wages.
Unemployment Insurance
Employers pay state and federal unemployment taxes based on a percentage of each employee’s salary. This tax is known as State Unemployment Taxes (SUTA) and Federal Unemployment Taxes (FUTA).
Step 6 – Workers’ Compensation Insurance
All businesses with employees (even a single part-time employee) are required to carry workers’ compensation insurance coverage to cover medical costs if employees are injured on the job. Worker’s Compensation Insurance is administered through the Colorado Department of Labor and Employment.
Step 7 – Labor Law Posters and Required Notices
Employers are to publicly display Federal and State of Colorado labor law posters. These posters are to be publicly displayed where they can be easily viewed by employees. These posters inform employees of their rights and employer responsibilities under labor laws.
Colorado labor law posters can be individually printed from the Colorado Department of Labor’s website.
Employee v. Independent Contractor
It is important to understand the differences between employees and independent contractors. Employers will sometimes improperly classify employees as independent contractors. To know if your employee is actually an employee or an independent contractor you can file IRS Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes, and Income Tax Withholding.
There is a lot to keep up with when hiring employees for your business. Your obligations and responsibilities as an employer don’t end there. Labor laws are complex and ever-changing. Be sure to keep up-to-date with the Colorado Department of Labor and Employment and the U.S. Department of Labor.
Don’t get caught paying for your subcontractors’ workers compensation
The Cost of Not Getting a Certificate of Insurance
Every year in Colorado, insurance companies perform an annual audit of your workers compensation policy. It is how they assess whether you paid the full amount of your premium and more importantly, the cost basis of that premium.
What is the cost basis? It’s your amount of risk that you are exposed to during the year. And that risk is summed up in the amount of work you paid to Subcontractors and Employees. So, the insurance company looks at your profit and loss statement and sees the amount of money you paid to those two categories. And that determines your premium amount.
Employee Coverage
This is typically why you got a workers compensation policy. By law, if you have employees, you have to carry coverage to protect those employees in the event their is a work place accident. As the owner your company, you can elect to opt out of coverage. And the end of the year audit determines if the amount your premium was based on, is the actual amount you paid in payroll totals. It could change. You could have hired a new project manager, or maybe an operations manager. Or the year could have been lean and you had to lay off several crews. Then your premium may go down.
But what if you don’t have any employees because everyone who works for you is a 1099 contractor?
1099 Contractor
Many contractors think that by hiring only 1099 contractors (framers, roofers, etc.) is saving them money. Well, it can. Employment taxes and insurance are expensive. But, did you know that if you do not get proof of coverage from EVERY subcontractor you could be on the hook for workers compensation coverage for them? So, let’s say, you hire a framer and pay them $220,000.00 for the year. The premium rate in Colorado could be as much as $8.00 / hundred dollars. So that means, an additional premium payment of $ 17,600.00! Just because you hire subcontractors does not mean that you are free from the obligation of carrying coverage.
Protect Yourself with a Subcontractor System
Proof of coverage is a formal document that proves a business (subcontractor) has workers’ comp coverage. Also known as a certificate of insurance, this document includes important policy details and proves coverage. Getting proof of coverage is a simple process. But if you wait until five days before your audit, it could be an impossible task. And, if you can not prove coverage going back to the time that year that you paid the subcontractor, then you are on the hook. So, it is best practice to have a system in place when you onboard a new subcontractor. Send them a welcome email and request the following information:
- Certificate of Insurance showing coverage of General Liability.
- Certificate of Insurance showing coverage of Workers Compensation.
- A signed w9, Request for Taxpayers Identification Number.
What if they are a sole proprietor? In the event your subcontractor is a sole proprietor and they perform all of the work themselves and they choose to waive coverage for themselves, you must ask them to fill out an Independent Contractor Form, waiving their right to coverage. This is a form provided by your insurance company. In Colorado, most contractors turn to Pinnacol Assurance to obtain a workers compensation policy. Pinnacol requires that their IC Form be used. Please check with your insurance company what their requirements are for proof of coverage.
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