For most small contractors, cash accounting works fine and is simpler to manage. But the right choice depends on your revenue level, project types, and what you need from your financial reports.

Cash accounting records income when you receive payment and expenses when you pay them. If a customer pays you in January for December work, that’s January income. Accrual accounting records income when you earn it and expenses when you incur them, regardless of when cash changes hands. Complete a job in December but don’t get paid until January? That’s December income under accrual.

The IRS allows most contractors to use cash accounting if average annual gross receipts are under $30 million for the prior three years. Above that threshold, you’re generally required to use accrual. There’s also a rule for long-term contracts where projects that span tax years may require percentage-of-completion accounting regardless of your overall method.

Most small contractors stick with cash because it’s easier to understand, requires less bookkeeping overhead, and gives some control over tax timing. If you’re approaching year-end with a lot of receivables, you can delay some income recognition. If you have bills to pay, paying them before December 31 creates deductions in the current year.

The downside of cash accounting for contractors is that your books don’t reflect what’s actually happening on jobs. You might have $80,000 in completed work sitting in receivables, but your income statement shows nothing until checks arrive. That makes it harder to see true job profitability or manage cash flow based on work performed versus work paid. For contractors serious about job costing and knowing real margins, accrual often makes more sense because revenue aligns with the costs incurred to generate it.

Some contractors use a modified approach where they keep cash basis for taxes but run accrual-style reports for management purposes. This requires more bookkeeping work but gives you both simpler tax filing and accurate job performance data.

The decision also depends on your customer mix. If you do mostly residential work with quick payment cycles, cash basis aligns well with reality. If you do commercial work with 60-90 day payment terms, retainage, and progress billing, cash basis can paint a misleading picture of how the business is actually doing.

Talk to your accountant before switching methods. The IRS has rules about changing accounting methods, and some changes require formal approval. If you’re already on one method, switching isn’t always straightforward.

Whether you need basic business bookkeeping or detailed job-level reporting, getting the accounting method right from the start saves headaches later. The method you choose affects how you track costs, when you recognize revenue, and ultimately how useful your financial reports are for making decisions.