Looking for a comprehensive guide on HVAC tax requirements for contractors in Texas? This resource is for you. It offers a complete breakdown of the sales tax laws for Texas, helping new industry professionals navigate the complexities of tax compliance.
As a new HVAC contractor, the last thing you want is to be buried in a pile of tax paperwork.
But the thing is, ignoring your small business taxes can lead to hefty fines and legal trouble.
By understanding the basics of small business taxes, you can keep your business on track and avoid costly mistakes.
In this blog post, we highlighted the various local, state, and federal taxes you’ll pay as a business owner, possible deductible expenses you can claim, and how to simplify your tax process, so you can focus on what really matters – growing your business.
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Different Types of Business Taxes For Texas HVAC Technicians
As a new heating and refrigeration contractor in Texas, there are different types of business taxes that you may be expected to pay.
Familiarizing yourself with these taxes will help you avoid penalties and fines, keep your business running smoothly, and minimize your tax liabilities.
Here’s a breakdown of the main taxes you need to keep in mind:
While you won’t have to pay state income tax in Texas, you may still be liable for federal income tax on your business earnings.
To simplify tax time, make sure you keep accurate records of your income and expenses.
Self-Employment Taxes (Social Security, Medicare, and Unemployment taxes)
HVAC contractors in Texas are expected to pay self-employment taxes.
These taxes include Social Security, Medicare, and Unemployment taxes. You pay them as part of your contributions to cover your own benefits.
In Texas, the self-employment tax rate for 2023 is 15.3% on the first $147,000 of net earnings.
You may also be subject to excise taxes on certain goods and services. Excise taxes are additional taxes on top of the regular sales tax and are typically applied to items like fuel or heavy equipment.
You can find a full list of items subject to an excise tax on the Texas Comptroller’s website Here
Sales tax is another form of tax you may have to pay as an HVAC contractor in Texas.
Though sales tax rates vary depending on the county and municipality where you do business, generally, services are not subject to sales tax, but products are.
So, you may be required to collect sales tax on the HVAC products you sell or recommend to customers.
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Business Expenses You Can Write Off As A HVAC Contractor
From my experience, tax write-offs are a smart way to boost your profits while minimizing your tax liabilities.
Maximizing tax deductions mean you can lower your tax bill and keep more of your money.
Here are some key tax deductions you may qualify for:
Home Office Deduction
If you have a dedicated space in your home for work purposes, you may be able to claim some of your home-related expenses, such as mortgage interest, property taxes, and utilities as tax deductions.
Since you likely use a vehicle for work-related activities, such as traveling to job sites or picking up supplies, it’s possible to deduct vehicle expenses such as gas, maintenance, and insurance.
However, you’ll need to keep detailed records of your business use to make sure the tax write-offs covered the correct usage.
Equipment and Tools
As an HVAC contractor, you need various equipment and tools to carry out your work effectively. Fortunately, you may be able to deduct these expenses, either fully or through depreciation over several years.
Do you often travel for business-related activities, such as attending conferences or meeting with clients?
You may be able to deduct expenses such as transportation, lodging, and meals. The travel must be primarily for business purposes, though to make the deductibles legal.
Advertising and Marketing Expenses
Effective advertising and marketing are essential to attract new clients to your HVAC business. Fortunately, you can deduct the cost of creating and distributing promotional materials and advertising in local media.
Part of your responsibility as an owner is buying different insurance coverages for your business and employees.
In Texas, the common insurance policies you need to operate an HVAC company, include liability insurance and worker’s compensation insurance.
The premiums you pay for these policies can be claimed as a tax write-off.
Retirement Plan Contributions
As a way to save for the future and lower your tax bill, you may want to consider contributing to a retirement plan, such as a SEP IRA or a Solo 401(k).
Your retirement plan contributions are tax deductible – and it is a great way to lower your current tax obligations while saving for retirement.
Record Keeping and Accounting For HVAC Companies
Proper record-keeping and accounting are essential to ensure a stress-free process when the tax season rolls by.
You see, not only does it help you to keep track of your business’s financial health, but it also ensures that you are complying with tax laws and regulations.
Additionally, with accurate data about your finances, you can make well-informed decisions for business growth.
That said, here’re some key points to consider when it comes to recording keeping and accounting for your small HVAC business.
Types of Business Records To Keep
You should keep records of all your business transactions, including invoices, receipts, and bank statements.
With these records, you can easily track your income and expenses, which will come in handy during tax season.
In addition to financial records, you should also maintain records of employee hours, payroll, and taxes.
These records will help you to stay organized and ensure that you are complying with labor laws and regulations.
In a nutshell, you should maintain:
- Invoices and receipts for all expenses and income
- Bank statements and credit card statements
- Purchase orders and work orders
- Payroll records
- Tax documents and licenses
- Contracts and agreements
- Asset and equipment records
Accounting Software Options
Thanks to recent technological advancements, there are now many accounting software options available for small business owners.
Based on our firsthand experience, these software solutions can help you keep track of your finances, generate financial reports, and even file your taxes – even if you’re on a budget.
Popular accounting software options include QuickBooks, FreshBooks, and Xero.
By using accounting software, you can save time and money, automate accounting tasks, and get real-time financial insights.
Hiring a Professional Accountant
If you don’t have the time or expertise to handle your business’s accounting and tax matters, you can always hire a professional accountant.
An accountant can help maintain accurate records, file your taxes, and offer financial advice.
When hiring an accountant, look for someone with experience in your industry. They should be familiar with the unique tax laws and regulations to which heating and refrigeration businesses are subject.
Additionally, consider their fees and availability to ensure they’re a good fit for your business.
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Quarterly Estimated Tax Payments For HVAC Technicians
As an HVAC contractor who owes their own business, paying your taxes is a tad different from employees who pay theirs through withholdings.
Most self-employed people pay quarterly estimated taxes, and that’s how you might be expected to send your tax payments to the IRS.
But what exactly are quarterly estimated tax payments, when are they due, and how can you calculate them?
Let’s break it down.
What Are Estimated Quarterly Payments?
Quarterly estimated tax payments are payments made to the IRS four times a year to cover the income and self-employment taxes that you owe on your earnings as an HVAC contractor.
Rather than having taxes withheld each paycheck, which is what happens when you’re an employee, you make these payments four times a year.
Estimated (Quarterly) Tax Payments Due Dates 2023
The due dates for quarterly estimated tax payments are:
- April 15th
- June 15th
- September 15th
- January 15th (of the following year)
Keep in mind that these dates can change slightly if they fall on a weekend or holiday.
How To Calculate Quarterly Estimated Tax Payments For 2023
Calculating your quarterly estimated tax payments can be tricky. But with the right framework, you can do it – even if you failed mathematics in high school.
So, here’s a simple, step-by-step way to do it:
Estimate your income for the year. – based on your revenue data from the previous year, you can predict how much you expect to make in the current year.
Your estimate should include all the income you expect to receive as an HVAC contractor.
Estimate your deductible expenses for the year – You should also have an idea of how much it costs you to operate your business.
Here you would want to sum up all your business expenses that qualify as deductibles.
Subtract your estimated expenses from your estimated Income to get your estimated taxable income.
Use the IRS Form 1040-ES to calculate your estimated tax bill.
Divide your estimated tax bill by four to determine how much you are to pay each quarter.
Tax Credits For Texas HVAC Technicians
You may not know it, but as an HVAC contractor, there are various tax credits and rebates you may be qualified for.
By taking advantage of these opportunities, you can lower your business taxes and keep more of the money you make in your pocket.
Here are two tax credits that you should know about:
Work Opportunity Tax Credit (WOTC)
When you hire veterans and people on food stamps (supplemental nutrition assistance program), you may qualify for WOTC, a tax credit scheme set up to incentivize business owners who provide employment for these target groups.
Employee Retention Tax Credit
The Employee Retention Tax Credit (ERTC) is the federal government’s initiative to reward businesses that retained their employees at the height of the pandemic.
Under the CARES Act, you can receive up to $21,000 for each qualifying W2-employee expense, including salary and health insurance, you paid to your workers during the lockdown.
However, to qualify for the program, you must be an eligible employer with less than 500 works and must have been affected by the Coronavirus or the government’s shutdown.
Learn more about the ERTC tax credit here.
Common Mistakes HVAC Technicians Make When Filing Tax Returns (And How To Avoid Them)
Avoiding tax-related mistakes is crucial, as it can mean the difference between a successful business and a legal nightmare.
While you can always hire a tax professional to file your returns, here’re common mistakes to avoid if can’t afford a tax preparer yet.
Not keeping track of expenses
Keeping records of your expenses, might on the surface, seem like a no-brainer. But, you’d be surprised by how many owners that struggle to keep proper records of their expenses.
You see, not only does it make financial sense to track your expenses, it helps make tax filing easy as well as ensure you’re claiming all eligible tax write-offs.
Failing to report all sources of income
All the income you make in a given financial year, whether you’re your investments or side hustles, must be reported on your tax returns.
Failing to report all income sources can result in penalties and even attract the IRS to audit your business (trust me you don’t want to be there).
Make sure you keep track of all income (here’s where recording keeping comes in) and report it accurately.
Misunderstanding tax credits
When leveraged properly, tax credits can help you reduce your tax burden significantly – but, that’s only if you understand what they are in the first place.
So, you may want to research all available tax credits and keep an eye out for the eligibility requirements and limitations to be sure you qualify for them.
If you’re still unsure about any tax credit, we recommend consulting with a tax professional.
Not reviewing your returns before submission
From our observations, a seemingly small mistake on your tax return can put you in trouble with the IRS and may cost you a lot of time and effort to rectify.
So, before submitting your tax returns, make sure to review them carefully for accuracy and completeness.
Double-check all calculations and ensure that all necessary forms and schedules have been included.
Failing to file on time
People miss the deadline to file their tax returns for several reasons. But, you don’t want to be in that situation as missing the deadline to file your returns can result in penalties and interest charges.
April 15th is usually the deadline to file your federal taxes – though, the date can change depending on the year and your location.
So, be sure to mark the date on your calendar and file your returns on time to avoid getting on the wrong side of the IRS.
Filing with incorrect personal information
Double-check everything, like your name, social security number, and address, before you hit that submit button.
Trust me, if you enter the wrong info, it can lead to some major headaches, like delays in processing or even triggering an audit.
So take a few extra minutes to review all your details before you file, and save yourself some trouble down the road.
Relying solely on tax software
Granted, tax software can simplify the filing process, but it’s not the end-all-be-all when it comes to filing your return.
For one, the software might not catch every deduction or credit that you’re eligible for, and it’s definitely not going to be able to answer all your tax questions.
Consulting with a tax preparer might be the way to go in order to maximize your deductions and discover mistakes you might otherwise miss.
Other common tax filing mistakes to avoid
- Failing to e-file
- Forgetting to sign your tax returns
- Not paying estimated taxes
- Failing to report virtual currency transactions
- Claiming improper deductions
- Failing to amend previous returns
- Not seeking professional help
- Overlooking state taxes
- Failing to reconcile your 1099s
- Failing to report foreign assets
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Final Thoughts On HVAC Tax Requirements For Texas Contractors
While tax codes change faster than you can keep up, it still doesn’t hurt to, at least, know the basics – that’s exactly what we set out to do with this post.
If you’re still unsure about your ability to handle your taxes, we recommend consulting with tax professionals with experience in your industry.
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HVAC Business Taxes FAQs
What is the difference between income tax and self-employment tax?
Income tax is levied on your profit as a business owner, while self-employment tax is a tax on the income earned by an individual who is self-employed.
Self-employment tax includes Social Security, Medicare, and unemployment taxes.
Do I need to pay excise tax as an HVAC contractor in Texas?
Excise tax is a tax on specific goods or services, and it applies to certain activities such as manufacturing, selling or using certain products, and some other activities.
So, if you perform services that are subject to excise tax, you will need to pay the tax.
How can I reduce my tax liability as an HVAC contractor?
There are several ways you can reduce your tax bills. Some options include taking advantage of tax deductions, investing in retirement plans, and working with a tax professional to find other tax-saving strategies.
What happens if I don’t pay taxes as an HVAC contractor in Texas?
Not paying your taxes as an HVAC contractor in Texas can result in penalties, interest charges, and even legal action.
It’s important to stay up-to-date on all tax obligations to avoid these consequences and ensure the success of your business.
Working with a tax professional can help ensure you are meeting all tax requirements and avoiding potential issues.
Can a new HVAC contractor deduct the cost of a new work vehicle from their taxes?
Yes, the cost of a new work vehicle can be deducted from the contractor’s taxes, but it’s important to keep accurate records and only deduct the portion of the vehicle’s cost that was used for work purposes.
What should a new HVAC contractor do if they receive an audit notice from the IRS?
You should review the notice carefully and gather all necessary documents and information. It’s recommended to seek the assistance of a tax professional or attorney who has experience with IRS audits.