California Contractor · Law & Business

Cash vs. accrual accounting: taxes and records for California contractors

Compare cash and accrual accounting, understand estimated tax payments and learn how long different business records must be kept.

Accounting methods affect when income and expenses are recognized. They do not change the need to know whether a project is making money or whether bills can be paid on time.

Cash basis vs. accrual: when income and expenses count

Under the cash method, income is generally recorded when received and expenses when paid. Under accrual, income is generally recognized when earned and expenses when incurred, subject to the applicable rules. An invoice date alone is not a universal recognition rule. ^S21

CSLB’s business guide does not recommend cash accounting as a management method for contractors. That is not an IRS ban on all contractors using it. Tax eligibility, small-business exceptions and rules for long-term contracts must be considered separately. Do not assume that every contractor can freely choose any long-term-contract method. ^{S12, S21}

Separate profit, tax and cash

The 15.3% self-employment tax rate combines Social Security and Medicare components. It is not a flat tax on all sales: the earnings calculation, Social Security limit and possible additional Medicare tax matter. Net self-employment earnings of $400 or more generally trigger the filing requirement for that tax. ^S21

For individuals using the calendar year, estimated-payment dates generally fall in April, June, September and the following January. They are not four equal three-month intervals. Weekends, holidays, special rules and disaster relief can change a deadline. Check the applicable year.

How long must a contractor keep tax records?

The ordinary federal income-tax period is often three years, but exceptions can require longer or indefinite retention. Employment-tax records generally need at least four years after the tax becomes due or is paid, whichever is later. A blanket “discard everything after three years” policy is unsafe. ^S21

When studying, note who each rule applies to and which records or taxes it covers. For running a business, agree on a documented accounting and retention process with your tax professional before a deadline becomes a problem.

Cash basis vs. accrual: when income and expenses count

Separate profit, tax and cash

How long must a contractor keep tax records?

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