Contractor accounting is different
Three things separate contractor accounting from generic small-business accounting. First, jobs are the unit of profitability and per-job tracking is mandatory; aggregate income statements are useless without per-job detail. Second, project timelines run long (months to years), so revenue recognition uses methods like percentage-of-completion that complicate the income statement. Third, the workforce is mixed (W-2 employees plus 1099 subcontractors plus owner-operators), so payroll and 1099 workflows both matter.
Feature priorities for contractors
Job costing (primary)
Every transaction tagged to a job: payroll labour, materials, subcontractor invoices, equipment use, fuel, third-party services. The accounting software should produce a per-job P&L on demand, a costs-to-date vs costs-budgeted variance, and a remaining-budget figure that flags jobs going over.
Progress billing and AIA forms
For commercial work, AIA G702 / G703 forms are the standard for monthly pay applications. Specialist contractor accounting handles these natively. Mainstream cloud accounting (QBO, Xero) handles progress billing in general but does not produce AIA forms without an add-on. For residential and light-commercial work, generic progress billing is usually sufficient.
Retainage tracking
For commercial work, the customer withholds a portion of each progress payment until project completion. The software must keep retainage A/R distinct from regular A/R and handle the release at milestone events. Specialist products handle this natively; mainstream cloud accounting requires a chart-of-accounts workaround (a separate retainage receivable account).
Subcontractor management
W-9 collection at onboarding, payment tracking by subcontractor, year-end 1099-NEC generation. Lien-waiver tracking for jurisdictions that require it. Insurance certificate (COI) management is sometimes part of contractor-specialist tools and sometimes a separate workflow.
Estimates-to-invoices conversion
Most contractors win work via estimates, then convert the estimate to a contract and invoice against it. The accounting software should let you build the estimate, tag it to a customer, convert it to a contract, then bill against milestones without rekeying.
Equipment tracking and depreciation
Equipment is a major balance-sheet asset for contractors and a significant depreciation expense. The software should support fixed-asset registers, depreciation schedules (straight-line, MACRS for tax purposes), and equipment-cost allocation to jobs.
Subcontractor 1099 workflow
If you pay subcontractors, the year-end 1099 process is the painful annual workflow your accounting software should make easier. The discipline:
- • Collect a W-9 from every subcontractor at onboarding, before the first payment.
- • Track payments in the accounting software with a 1099-eligible flag, separated from non-1099 payments (corporations are generally not 1099-eligible).
- • At year-end, the software produces 1099-NECs from the year's payments to flagged subs.
- • E-file with the IRS and deliver copies to the subs by January 31.
- • If a sub did not provide a W-9 or refused to, you may be required to do backup withholding (24 percent of payments) and remit to the IRS.
See /feature/1099-workflow for the dedicated chapter.
Category recommendations
| Category | Fit | Why |
|---|---|---|
| Free / low-barrier | Not the fit | Insufficient job costing, progress billing, and 1099 support for any contractor business beyond a single-handyman. |
| Mainstream small-business cloud | Strong fit | Default fit for residential and small-commercial contractors. Plus or Advanced tier for project-tracking and class tracking. |
| Contractor / construction specialist | Strong fit | Right category for commercial GCs, public-works contractors, and larger sub-trades. AIA forms, certified payroll, retainage, lien-waiver tracking native. |
| Service-business specialist | Not the fit | Built for invoicing-heavy professional services; weak job costing and no AIA support. |
| Mid-market | Acceptable fit | Right category if you have multiple entities, multi-state operations, or a fleet of equipment. |
| Managed bookkeeping services | Acceptable fit | Defensible if you outsource books; verify the service is fluent with job-costing and 1099 workflow before committing. |
Frequently asked questions
What is job costing and why does it matter for contractors?
Job costing is the discipline of tracking costs (labour, materials, subcontractors, equipment) to specific jobs so you can calculate per-job profitability. For contractors, it is the central accounting workflow: jobs vary widely in margin, and aggregate profitability hides loss-making work. The accounting software should let you tag every transaction (timesheet, material purchase, sub invoice) to a job, then produce per-job P&L, percentage-of-completion calculations, and outstanding-cost reports.
What is retainage and how is it tracked in accounting?
Retainage (sometimes called holdback) is a portion of contract payments withheld by the customer until the project reaches certain milestones, typically substantial completion. Common in commercial construction at 5 to 10 percent of each progress payment. The accounting must record the full earned revenue but distinguish between received cash and retainage held; without this distinction, your A/R balance is wrong and your project margin looks better than it is.
What is AIA-style progress billing?
AIA refers to the American Institute of Architects standard forms (G702 / G703) used in commercial construction for progress billing. The contractor reports completed work as a percentage of each line item; the architect or owner certifies the percentage; the contractor invoices for the certified amount. Some accounting products generate AIA-format pay applications natively (QuickBooks Desktop Contractor, Sage 100 Contractor, Foundation, others); QBO and Xero generally do not, requiring a workaround or an add-on.
Do I have to issue 1099s to my subcontractors?
Yes, if you pay an unincorporated subcontractor more than $600 in a calendar year. The form is 1099-NEC (Nonemployee Compensation), filed with the IRS and provided to the contractor by January 31 of the following year. Most accounting software generates 1099-NECs from the year's payments, with a fee per form. Collect a W-9 from every subcontractor before you pay them; without it, you may be required to do backup withholding. See /feature/1099-workflow.
Related guides
Companion pages on this site and on our portfolio of independent pricing references.
Year-end 1099 generation, W-9 collection, backup withholding.
Many contractors operate as S-Corps for the FICA savings.
Sole proprietor chapter for the smallest single-trade businesses.
The five decisions and the features checklist.
Common payroll product for contractors with W-2 employees.