9.4 Federal and California Taxes for Roofing Contractors
Key Takeaways
- A roofing contractor's federal income tax filing follows the entity form: Schedule C for a sole owner, Form 1065 for a partnership, Form 1120 for a C corporation, and Form 1120-S for an S corporation.
- Self-employment tax of 15.3 percent — 12.4 percent Social Security up to the annual wage base plus 2.9 percent Medicare with no ceiling — applies to a sole owner's and a general partner's net earnings from self-employment.
- California imposes an $800 minimum annual franchise tax on corporations and an $800 annual tax on LLCs, and an LLC also owes a separate fee based on total California-source income.
- Under CDTFA Regulation 1521 a construction contractor is the consumer of the materials it furnishes and installs, so a roofer pays sales or use tax on the purchase of shingles, tile, and membrane and does not charge the customer sales tax on those materials.
- Contractors routinely miss two local obligations: the city or county business license tax in every jurisdiction where they work, and the annual Business Property Statement (Form 571-L) reporting trucks, tools, and equipment to the county assessor.
Federal and California Taxes for Roofing Contractors
Quick Answer: Which returns you file is decided by your entity form. A sole owner files Schedule C and pays self-employment tax at 15.3 percent (12.4 percent Social Security up to the annual wage base, plus 2.9 percent Medicare with no ceiling). California adds the $800 minimum franchise tax on corporations and the $800 annual tax on LLCs, plus a separate income-based LLC fee. The rule that surprises most new roofing contractors is the sales tax one: under CDTFA Regulation 1521 a contractor is the consumer of the materials it furnishes and installs, so the roofer pays tax on the purchase of shingles, tile, and membrane and does not charge the homeowner sales tax on them.
1. Federal Income Tax by Entity Form
| Entity | Return filed | Who pays the income tax |
|---|---|---|
| Sole ownership | Schedule C with Form 1040 | The owner, at individual rates |
| Partnership / multi-member LLC | Form 1065 plus Schedule K-1 to each partner | The partners, on their own returns |
| C corporation | Form 1120 | The corporation; distributions taxed again to shareholders |
| S corporation | Form 1120-S plus K-1s | The shareholders, on their own returns |
| Single-member LLC | Disregarded — usually Schedule C | The member |
Self-Employment Tax
A sole owner and a general partner pay self-employment tax on net earnings from self-employment:
- 12.4 percent Social Security, applied up to the annual Social Security wage base (indexed each year)
- 2.9 percent Medicare, with no ceiling, plus the Additional Medicare Tax on higher earnings
- Total base rate 15.3 percent, with one-half deductible in computing adjusted gross income
An S corporation owner who takes a reasonable salary through payroll pays FICA on the salary, and remaining profit distributions are not subject to self-employment tax. The salary must be genuinely reasonable for the services performed — understating it is a recurring audit issue.
Estimated Payments
Federal estimated income tax for individuals is due in four installments, generally April 15, June 15, September 15, and January 15 of the following year. Corporations follow their own quarterly schedule. Underpayment triggers penalties, so contractors with lumpy seasonal income should recompute at each installment rather than paying one-fourth of last year blindly.
2. California Income and Entity-Level Taxes
- Corporations (Franchise Tax Board). Subject to the corporate franchise tax, with an $800 minimum franchise tax per year. An S corporation pays the greater of the $800 minimum or 1.5 percent of California net income.
- Limited liability companies. Owe an $800 annual tax plus a separate LLC fee that steps up with total California-source income. Both are owed regardless of profitability.
- Sole owners and partners. Report business income on the California personal income tax return.
- Nonresident subcontractors. Payments to out-of-state contractors may require California backup withholding.
Confirm current rates and thresholds with the Franchise Tax Board before relying on them — the $800 minimums are statutory, but the LLC fee tiers and indexed figures change.
3. Employment Taxes (Covered in Depth in Chapter 10)
As an employer, the roofing contractor owes and remits:
| Tax | Agency | Paid by |
|---|---|---|
| Federal income tax withholding | IRS (Form 941 quarterly) | Employee, withheld |
| Social Security and Medicare (FICA) | IRS (Form 941) | Split — employer and employee each pay half |
| Federal unemployment (FUTA) | IRS (Form 940 annual) | Employer only |
| California Unemployment Insurance (UI) | EDD (DE 9 / DE 9C quarterly) | Employer only |
| Employment Training Tax (ETT) | EDD | Employer only |
| State Disability Insurance (SDI) | EDD | Employee only, withheld |
| California Personal Income Tax (PIT) withholding | EDD | Employee, withheld |
Deposit frequency for federal payroll taxes is driven by the size of the payroll tax liability, determined by a lookback period — not by the number of employees, the age of the business, or the mix of salaried and hourly workers.
4. Sales and Use Tax: The Materials vs. Fixtures Rule
This is the tax question most often missed on the Law and Business exam.
Under CDTFA Regulation 1521, a construction contractor is:
- The consumer of MATERIALS it furnishes and installs. The contractor pays sales or use tax on its purchase price of the material and does not collect sales tax from the customer. Roofing goods — shingles, tile, shakes, membranes, felts, base sheets, insulation board, adhesives, sheet metal flashing, fasteners — are materials.
- The retailer of FIXTURES it furnishes and installs. The contractor collects tax on the sale price of the fixture. Fixtures are items that retain their identity as accessories when installed — examples in other trades include furnaces, air conditioning units, and prefabricated cabinets.
Practical consequences for a roofer:
- Your supplier charges you sales tax on the shingles. That tax is part of your material cost and must be carried in the estimate.
- You do not add a sales tax line to a residential reroof invoice for the shingles. Adding one is both incorrect and a consumer complaint waiting to happen.
- Use tax applies when you buy material out of state or online without California tax and bring it in for use here.
- Keep resale certificates and purchase records straight. If you occasionally sell material over the counter without installing it, that is a retail sale and you need a seller's permit and must collect tax on it.
5. Local Taxes and the Business Property Statement
Two obligations contractors routinely forget:
- City and county business license tax. Most California cities require a business license — and a separate one in each jurisdiction where you perform work, not just where your yard is. Many cities audit building permit records against business license rolls, which catches roofing contractors quickly.
- Business Property Statement (Form 571-L). Filed annually with the county assessor reporting the cost and acquisition year of business personal property — trucks and trailers, compressors, hoists, ladders, power equipment, computers, and office furniture. Unsecured property tax is assessed on it. The filing deadline is generally April 1, with a penalty applied after mid-May.
6. Records and Working With a Professional
Keep separate business bank and card accounts; commingling is the fastest way to lose deductions in an audit. Retain payroll records three years under California law, injury records five years, and tax records generally at least four years after filing. Move withheld payroll taxes into a segregated account on payday — withheld employee taxes are trust fund money, and responsible individuals can be assessed personally for unpaid trust fund taxes even where the business is a corporation or LLC.
Finally: the Law and Business exam tests the structure of these obligations, not the current-year rate tables. Learn which agency collects what, who bears each tax, what drives deposit frequency, and the materials-versus-fixtures rule — then confirm every rate with the IRS, FTB, EDD, and CDTFA before you file.
A California C-39 contractor installs $22,000 of concrete roof tile on a residence. How does sales tax apply?
What determines how often an employer's federal payroll tax deposits must be made to the IRS?
A roofing business is organized as a California limited liability company and had a modest loss last year. What does it owe the state at the entity level?