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In the construction industry, payroll processing isn’t as simple as issuing a paycheck.

Contractors and construction businesses face a unique array of tax obligations due to their work structure, employee variety, and many projects’ multi-state nature.

Understanding which tax forms are required at the federal, state, and local levels is one of the biggest challenges for businesses in the construction industry, and it’s crucial for maintaining compliance with government regulations.

This complexity is highlighted by a recent study conducted by the Tax Foundation, which found construction companies, on average, increased funds allocated to tax compliance by 29% from 2017 until 2023.

This significant rise emphasizes the importance of understanding and adhering to tax regulations.

To help you stay compliant, we created this high-level overview of the most common tax forms a construction payroll processor might encounter, complete with where they are submitted and what’s involved.

For a comprehensive guide on handling your construction company’s year-end payroll responsibilities and deadlines, check out our article on Overcoming the Challenges of Year-End Construction Payroll.

Key Tax Compliance Takeaways for Payroll Processors in the Construction Industry:

• Construction payroll involves a unique array of federal, state, and local tax forms, making compliance challenging.
• Payroll processors must understand and adhere to various forms, including W-2, 941, 940, 1099-NEC, state income tax withholding forms, state unemployment insurance forms, workers’ compensation forms, and local tax forms.
• Construction companies working on public projects must submit certified payroll reports, such as Form WH-347, to comply with wage standards and regulations like the Davis-Bacon Act.
• Using a construction-specific payroll service can help streamline tax compliance, ensure accuracy, and reduce the risk of penalties.

Federal Tax Forms

Federal tax compliance is a primary focus for payroll processors in any industry, and the construction sector is no exception.

Form W-2: Wage and Tax Statement

The W-2 tax form is one of the most well-known. It reports wages paid to employees and the taxes withheld from those wages.

In the construction industry, W-2 forms can be especially complicated when employees work across state lines or for different hourly rates.

Each employee’s W-2 must be filed with the Social Security Administration (SSA) and provided to employees by the end of January.

The Social Security Administration recommends checking W-2 annual wage report files for errors like:

• Tax Year
• Employment Type
• Balancing
• Employer Identification Number

before submitting to reduce the possibility of receiving a resubmission notice.

Form 941: Employer’s Quarterly Federal Tax Return

The 941 tax form is filed quarterly to report income taxes and Social Security and Medicare taxes withheld from employees’ paychecks.

This form is filed with the Internal Revenue Service (IRS) four times per year — April, July, October, and January.

For construction firms with fluctuating payrolls, like those with seasonal or project-based hiring, accuracy with Form 941 is crucial to avoid penalties.

Form 940: Employer’s Annual Federal Unemployment (FUTA) Tax Return

Construction companies must also file Form 940 with the IRS annually, which covers federal unemployment taxes (FUTA) paid by employers and not withheld from employees.

FUTA tax helps provide funding for federal and state unemployment benefits, and construction payroll processors must be vigilant about filing and paying FUTA accurately, given the industry’s fluctuating hiring patterns.

Form 1099-NEC – Nonemployee Compensation

Independent contractors are a frequent part of the construction industry, making Tax Form 1099-NEC essential.

This form is issued to independent contractors, classified as non-employees, who are paid $600 or more during the year.

According to the U.S. Department of Labor, federal and state employment law protections are generally available only to employees and not generally available to independent contractors.

Since independent contractors are often crucial in construction, payroll processors should carefully check worker classifications, ensure these forms are completed accurately, and provide the construction contractors with a copy sent to the IRS.

State Tax Forms

State tax requirements vary widely, and construction payroll processors need to be especially attentive to the unique requirements in each state where a company operates.

State Income Tax Withholding Forms

Most states have forms for reporting income tax withholding from employees’ wages.

Each state has a different version of these forms, typically filed quarterly or annually with the state’s Department of Revenue (DOR) or a similar agency.

For example, in states like California and New York, construction companies need to be meticulous with these filings due to complex withholding rules that may vary for different job types or regions.

State Unemployment Insurance (SUI) Tax Forms

State unemployment insurance (SUI) is required in most states and differs from the federal FUTA tax.

Each state has its own SUI reporting form, usually submitted quarterly to the state’s unemployment agency.

Construction companies need to pay close attention to SUI rates and reporting as they can change annually and vary by employee count and wages.

Many states also offer credit adjustments for timely FUTA payments, which payroll processors should keep in mind.

Workers’ Compensation Forms

While not a tax, workers’ compensation insurance reporting is a key part of payroll for construction companies.

States require regular reporting of employee wages and hours to calculate the correct workers’ comp premiums.

Payroll processors should check with their state’s Department of Labor or equivalent agency, as each state has unique forms, filing timelines, and insurance providers for workers’ compensation.

Local Tax Forms

Local tax requirements can be particularly tricky, especially for construction companies working across multiple cities or counties.

These taxes may include local income tax, occupational taxes, or specific assessments for city projects.

Local Income Tax Withholding Forms

Some municipalities, such as those in Ohio or Pennsylvania, impose local income taxes on employees.

Payroll processors need to be aware of these additional taxes, as well as how to report them.

Local income tax forms are generally filed with the local tax authority and can have different filing schedules, often quarterly or monthly.

Occupational Privilege Tax Forms

Certain localities have occupational privilege taxes, which are essentially fees for the privilege of working within that jurisdiction.

These are more common in states like Kentucky and Pennsylvania. Payroll processors should ensure that applicable occupational tax forms are submitted correctly, typically with the local city or county tax office.

Certified Payroll Reports

In addition to federal, state, and local tax forms, construction companies often need to submit certified payroll reports when working on public projects or government contracts.

These reports, usually required under the Davis-Bacon Act for federally funded projects, demonstrate compliance with wage standards and require detailed employee and wage information.

Certified payroll reports, such as the commonly used Form WH-347, are submitted weekly to the federal, state, or local agency managing the project.

These forms are critical for compliance with Davis-Bacon jobs and must include information about employee hours, wages, and deductions. Payroll processors must be precise in reporting to avoid severe penalties or contract delays.

Tips for Managing Tax Compliance in Construction

Tip #1: Use a Specialized Construction Payroll Service

Construction payroll involves unique complexities like multi-state payroll, union payroll reporting, and prevailing wage calculations.

Construction-specific payroll services are tailored to handle these challenges, helping ensure accuracy and timely submission.

Tip #2: Stay Informed About Changing Regulations

Tax laws can vary from one year to the next, especially with shifts in local or state legislation.

Payroll processors should make a habit of regularly checking government guidelines and updates from the IRS, state DORs, and other agencies.

Tip #3: Keep Detailed Records

Accurate record-keeping is essential, not only for tax compliance but also for audits and certified payroll requirements.

Having organized, detailed records can help streamline reporting and reduce potential errors.

See How Payroll4Construction Can Help Manage Your Tax Forms

Tax compliance is a challenging but critical component of payroll for construction companies.

Understanding federal, state, and local tax forms, as well as certified payroll reports, can help payroll processors and their companies avoid penalties and ensure smooth project operations.

By outsourcing payroll to a construction-specific payroll service like Payroll4Construction, contractors can focus on what they do best while leaving the complexities of construction payroll and tax form compliance to the experts.

Chat with a specialist today to see more!