Is labor taxable for contractors?
It depends on your state, and sometimes on the job. Sales tax is state law, so the same service call can be taxable in one state and exempt in the next. Iowa taxes plumbing repair labor, Georgia doesn't tax itemized repair or installation labor, and Texas taxes labor on a restaurant repair but not on the same repair in a family home. Check your state revenue department's list before you set up your invoices, and treat whatever you collect as the state's money, not income.
The rules below come from each state's own pages as of October 2026. They change, so read your state's current page before you rely on any of them.
Is your service taxable in your state?
| State | What its revenue department says |
|---|---|
| Georgia | Most services are exempt, and "itemized charges made for repair labor or installation labor are not subject to sales tax." Service providers generally pay tax on the materials they use. |
| Texas | "Labor to repair, remodel, or restore residential real property is not taxable." The total charge to repair or remodel nonresidential property, such as offices and restaurants, is taxable. Pest control, janitorial and landscaping are taxable services. |
| Iowa | Taxable services include plumbing (drain cleaning included), electrical repair and installation, extermination, painting, landscaping and lawn care, and carpet cleaning. New construction and remodeling are exempt; "repair services remain taxable." |
| Washington | Installing, repairing, cleaning and decorating property for others, painting, furnace and septic tank cleaning, and landscaping are retail services subject to sales tax when provided to consumers. |
Sources: Georgia, Texas (and its list of taxable services), Iowa, Washington. California warns that "many types of labor charges are subject to tax" there, with separate rules for work on buildings.
Look at what that means for one trade. A pest control company charges tax on its treatments in Texas and Iowa. The same company in Georgia generally doesn't charge it on the service, but pays tax on the products it buys. The work is the same; the invoice changes at the state line.
Where you owe it: nexus in one sentence
You owe a state's sales tax once you have nexus there, a legal connection such as crews and trucks working jobs in the state, and since the Supreme Court's Wayfair decision, states can also require sellers with no physical presence to collect, according to the Streamlined Sales Tax Governing Board. If you work near a state line, check both states.
Collected tax is a liability, not income
The IRS agrees the money isn't yours. Publication 334 says sales taxes "imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income." Book them to a Sales Tax Payable account on the balance sheet, not to sales. The exception: if your state's tax is imposed on you as the seller, Pub 334 says what you collect goes into gross receipts, so ask your CPA which kind yours is.
The bank account doesn't know any of this, and a balance that includes the state's money is easy to spend. Brandon Vaughn, who coaches home service owners, gave an owner trying to dig out of debt a fix that works the same way for sales tax. Move the money the day it lands:
…as soon as it hits your bank account, take 2%, just take it, pull it out, and stick it into a savings account that you can't touch… It's that Parkinson's law that applies to not just your time, it applies to your cash. If it's there, it's more tempting to use it.
For sales tax, the percentage isn't a guess. It's the tax on that invoice. If your invoicing software separates it, sweep the tax total into a separate account each week and leave it there until the return is due. Do the same with the money you set aside for income tax (tax planning for contractors covers that account).
A monthly sales tax routine
Even if your state lets you file quarterly, close the sales tax books every month:
- Sweep the tax from each week's deposits into the sales tax account.
- Reconcile the bank and card-processor deposits so paid invoices match the money that arrived.
- Run your sales tax liability report by jurisdiction (QuickBooks Online has one under Reports) and compare it with the Sales Tax Payable balance on your balance sheet. They should match.
- Check the coding on unusual jobs: commercial versus residential work in a state like Texas, material-heavy jobs, and customers who gave you an exemption certificate.
- File and pay by your state's date. Washington, for example, assigns monthly, quarterly or annual filing based on your income, with monthly returns due the 25th of the next month (Washington DOR).
- Record the payment against Sales Tax Payable, not as an expense, and save the confirmation.
Setting up that liability account is part of a chart of accounts built for contractors. If the payable balance and the report haven't matched in months, bring both to a free profit call before the next return is due.
Common sales tax questions
Do I charge sales tax on materials?
It depends on the state and on how you write the contract. In Texas, a residential contractor on a lump-sum contract pays tax on materials when buying them and doesn't charge the customer tax; on a separated contract, the contractor collects tax on the materials. Georgia treats most service providers as the end user of their materials, so they pay the tax up front.
Is the sales tax I collect part of my income?
Not on your federal return, if your state imposes the tax on the buyer. Pub 334 says to leave it out of gross receipts and not to deduct it either. Your tax prep pro should see it as a liability on the balance sheet, which is one more reason to keep it in its own account (how to separate business money).
What if I should have been charging tax and wasn't?
Talk to a CPA before you call the state. Some states run voluntary disclosure programs. New York's, for one, lets eligible taxpayers who owe back taxes and haven't filed the returns avoid monetary penalties by coming forward (New York's program). Terms differ by state.
