Financial Glossary for Contractors
Running a contracting business means juggling bids, builds, and a mountain of financial paperwork most people never deal with. Here's every financial term contractors need to know — explained in plain English, not accountant-speak.
21 terms organized by category
Tax & Compliance
1099-NEC vs 1099-MISC
The 1099-NEC reports nonemployee compensation (what you earned as a contractor), while the 1099-MISC covers other miscellaneous income like rents, royalties, and prizes.
Self-Employment Tax
A 15.3% tax that self-employed individuals pay to cover Social Security (12.4%) and Medicare (2.9%) — essentially both the employer and employee halves of payroll tax.
Quarterly Estimated Taxes
Payments you make to the IRS four times a year to cover your income tax and self-employment tax, since no employer is withholding taxes from your contractor paychecks.
Schedule C
The IRS form (Schedule C, Profit or Loss from Business) that sole proprietors and single-member LLCs use to report business income and expenses on their personal tax return.
W-9
A form you fill out to give your clients your taxpayer identification number (TIN) so they can properly report payments they made to you on a 1099.
Independent Contractor vs Employee
An independent contractor controls how, when, and where they do their work and pays their own taxes, while an employee works under the direction of an employer who withholds taxes and may provide benefits.
Home Office Deduction
A tax deduction that lets you write off a portion of your home expenses (rent, mortgage interest, utilities, insurance) if you use part of your home regularly and exclusively for business.
Mileage Deduction
A tax deduction for the business miles you drive, calculated either at the IRS standard mileage rate (67 cents per mile in 2024) or by tracking your actual vehicle expenses.
Net Income vs Gross Income
Gross income is the total money your contracting business brings in before any expenses, while net income is what's left after you subtract all business costs — and it's what you actually pay taxes on.
Invoicing & Payments
Lien Waiver
A document a contractor or subcontractor signs to give up their right to file a mechanic's lien against a property, typically in exchange for receiving payment.
Retainage
A percentage of each progress payment (typically 5-10%) that the project owner withholds until the project is substantially complete, serving as a financial incentive to finish the work.
Progress Billing
A billing method where you invoice for work completed during a specific period rather than waiting until the entire project is finished, keeping cash flowing throughout the job.
Mechanic's Lien
A legal claim a contractor, subcontractor, or supplier can place on a property when they haven't been paid for work performed or materials supplied, giving them a security interest in the property itself.
Per Diem
A fixed daily allowance paid to cover lodging, meals, and incidental expenses when a contractor travels away from their regular work area for a job.
Accounts Receivable Aging
A report that categorizes your outstanding invoices by how long they've been unpaid — typically in 30-day buckets (current, 30, 60, 90, 120+ days) — showing you who owes you money and how overdue it is.
Cash vs Accrual Accounting
Cash accounting records income when you receive payment and expenses when you pay them, while accrual accounting records income when you earn it and expenses when you incur them — regardless of when money changes hands.
Insurance & Liability
Liability Insurance
Insurance that protects your contracting business from financial losses when you're held responsible for property damage, bodily injury, or other claims arising from your work.
Bonding / Surety Bond
A three-party agreement where a surety company guarantees to the project owner that you'll complete the work according to the contract — and if you don't, the surety pays to make it right.
Workers' Compensation for Contractors
Insurance that covers medical expenses and lost wages for employees injured on the job, required by law in nearly every state for contractors with employees.
Retirement & Benefits
Solo 401(k)
A retirement plan designed for self-employed individuals with no full-time employees, allowing you to contribute as both the employer and employee for significantly higher annual limits than a traditional IRA.
SEP IRA
A Simplified Employee Pension IRA that lets self-employed individuals contribute up to 25% of net self-employment earnings (max $69,000 in 2024) to a tax-deferred retirement account with minimal paperwork.
Other Business Type Glossaries
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