Figuring out if your labor is taxable can be confusing. It’s not easy to determine whether or not the work you do or take is taxable. There are a lot of factors to consider, and tax laws change all the time.
We’ve created this article to help make sense of Texas’ labor tax laws. In it, we’ll answer some of the most common questions people have about labor taxes in Texas.
Is labor in texas taxable? Labor in texas can be taxable or non-taxable. It depends upon the work for which labor is being used. All labor and material expenses for restoring, replacing, enhancing, or upgrading existing nonresidential real estate are subject to tax. The cost of any type of residential construction work (new construction or repair and remodeling) is not taxed.
If you’re dealing with tax issues related to your labor or business, you may benefit from seeking the assistance of a reputable tax relief service. One such service that I recommend is Optima Tax Relief. Check out my review of Optima Tax Relief to learn more about their services and how they can help you navigate Texas’ labor tax laws.
Is Labor In Texas Taxable?
Under Tax Code Section 151.0101, taxable services are defined as “a wide range of services.” Each category contains a variety of distinct services. Listed below are the types of services that are taxable, including examples and references to additional information.
- Amusement Services
- Cable Television Services and Bundled Cable Services
- Credit Reporting Services
- Data Processing Services
- Debt Collection Services
- Information Services
- Insurance Services
- Internet Access Services
- Laundry, Cleaning and Garment Services
- Motor Vehicle Parking and Storage Services
- Nonresidential Real Property Repair, Restoration or Remodeling Services
Charges for labor and material to restore, replace, enhance, modify, or upgrade existing nonresidential real estate are subject to tax.
The cost of any type of residential construction work (new construction or repair and remodeling) is not taxed.
Nonresidential real property is defined as commercial enterprises such as manufacturing facilities, restaurants, offices, farms, ranches, and hospitals as well as parking lots, retention ponds, and similar improvements. It does not include residential properties such as apartment complexes or retirement homes.
Nonresidential real property repair, restoration, or remodeling does not include the creation of new usable square footage or scheduled and periodic maintenance.
Residential Versus Commercial Property
The laws on sales and use taxes also require contractors to differentiate between residential and non-residential (commercial) real property. Residential real estate is defined as a family home, multi-family building, housing complex, nursing home, condominium, or retirement residence that is used as such. The term refers to swimming pools, laundry rooms, and other common spaces available for use by renters. Everything else is considered non-residential real estate. Examples include hotels, motels, hospitals, prisons, rehabilitation centers, and recreational vehicle parks.
The distinction between residential and non-residential properties is significant since the cost of any sort of residential construction labor (new construction or repair and remodeling) is not taxed.
Calculating Tax On Labor
Contract Pricing
Contract pricing terms are essential to determining contractors’ Texas sales and use tax obligations because, when the labor part of a project is non-taxable (e.g., new construction or residential repair and remodeling), contract pricing determines who the consumer of taxable items utilized for the project is, and thus who owes the tax or qualifies for the resale
Lump-sum v. Separated
Contract pricing terms are divided into two categories for sales and use tax purposes in Texas: lump-sum or separated.
- A lump-sum contract is one in which the contract price is a single, whole amount, and any material fees are not separated from other labor and skill expenses.
- In comparison, a separated contract is one in which the agreed price for the entire contract is split into a separately-stated cost for parts and a separately-stated cost for all labor and expertise.
This expenditure includes fabrication, installation, and other contractor-completed labor. It does not matter whether separately stated prices for incorporated materials and labor are added together to determine a total.
A lump-sum contract is taxed as a service. As a result, the contractor’s fee is either completely taxable or nontaxable, depending on the type of work performed. A lumpsum contractor, for example, who is erecting a new office building would not charge his client Texas sales and use tax since construction labor is not taxable and the lump-sum nature of the contract considers the contractor as offering a non-taxable new construction service.
However, A contractor is typically treated as selling to his customer construction labor (which may or may not be taxable) and materials (which are taxable tangible personal property) under a contract that separates these items.
In the example, if a contractor uses a separate contract for a new construction project instead of an integrated one, the contractor will charge his customer only Texas sales and use tax on the material cost because non-taxable labor is not included in the combined materials and labor price.
How To File Federal Tax On Labor In Texas?
The amount paid for labor should be declared in the book of accounts if it is taxable. The tax has to be declared in Schedule C, Form 1040 (Profit or Loss from Business) of federal income tax along with other business income, expenses & losses.
Taxability Dependent on Type of Labor Performed.
If the labor involved is non-taxable (e.g., residential real property work), the labor portion of a lump-sum contract cannot be taxed. If the labor involved is taxable (e.g., non-residential real property work), it can only be taxed in certain situations:
- The contractor must separate and identify each material and charge customers sales tax on materials; or
- The contractor can separately state the entire price of a lump-sum contract and charge sales tax on the total amount before apportionment.
Federal regulations for this question are very few as compared to Texas regulations. The only mention in regulations about labor is under ‘Construction or repair’ (Policy Statement 5-15), where they mention that construction services are taxable except when the construction “consists primarily of labor”.
State Tax On Labor (in texas)
Labor in texas can be taxable or non-taxable. It depends upon the work for which labor is being used. All labor and material expenses for restoring, replacing, enhancing, or upgrading existing nonresidential real estate are subject to tax. The cost of any type of residential construction work (new construction or repair and remodeling) is not taxed.
Conclusion
So, what does this mean for those of us in Texas? If you are doing any restoration, replacement, enhancement, or upgrading work on an existing piece of nonresidential real estate, your labor, and material expenses will be subject to tax. However, if you are working on a new residential construction project or repairing/remodeling a home, your labor costs will not be taxed. Hope this article was helpful!