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Construction Companies: Payroll Mistakes to Avoid (2026)
The costliest payroll mistakes in construction companies are misclassifying laborers and carpenters, leaving prevailing wage compliance out of the overtime regular rate, and missing the construction company tax rule cited here, IRS Notice 2025-54. Each one compounds every pay cycle until an audit or a wage claim finds it. BEG: $45 per employee per month inside the payroll software you already use, live in 3 to 5 days.
Mistake 1: classification
The IRS Construction Industry Audit Technique Guide states that the use of subcontractors is common in construction and that many taxpayers treat employees as subcontractors to avoid paying employment taxes; examiners are told to consult an employment tax specialist on these issues, and backup withholding can apply to subcontractors.
Mistake 2: hours and the regular rate
DOL lists these typical construction violations: not recording work before or after the shift, shorting hours as down time or rain delay, unpaid meal breaks where the employee is not fully relieved, banking overtime as comp time, failing to combine hours worked in more than one job classification in the same workweek, and not paying for travel from the shop to the work site and back.
A construction business with two or more employees and $500,000 or more in annual gross sales is covered by the FLSA, and individual employees whose work involves interstate commerce are covered regardless of the employer's sales. Overtime is owed after 40 hours in each workweek; paying overtime only after 80 hours in a biweekly period is illegal because each workweek stands alone.
Mistake 3: the construction company tax item
For per diem allowances paid for travel away from home on or after October 1, 2025, the IRS high-low substantiation rates are $319 per day for high-cost localities and $225 for all other localities in the continental United States, of which $86 and $74 are treated as paid for meals. The incidental-expenses-only rate is $5 per day.
What catches them
A pay code review at setup, an exemption file per employee, a regular-rate flag on every pay component, and a deposit calendar that does not depend on one person remembering. Failure-to-deposit penalties run 2 to 15 percent; back overtime runs at time and one half plus an equal amount in liquidated damages.
The rules behind this page, with sources
General information, not legal advice. Every rule below was read on the agency page linked next to it.
- The IRS Construction Industry Audit Technique Guide states that the use of subcontractors is common in construction and that many taxpayers treat employees as subcontractors to avoid paying employment taxes; examiners are told to consult an employment tax specialist on these issues, and backup withholding can apply to subcontractors. [IRS Publication 5522]
- DOL lists these typical construction violations: not recording work before or after the shift, shorting hours as down time or rain delay, unpaid meal breaks where the employee is not fully relieved, banking overtime as comp time, failing to combine hours worked in more than one job classification in the same workweek, and not paying for travel from the shop to the work site and back. [DOL Fact Sheet #1]
- A construction business with two or more employees and $500,000 or more in annual gross sales is covered by the FLSA, and individual employees whose work involves interstate commerce are covered regardless of the employer's sales. Overtime is owed after 40 hours in each workweek; paying overtime only after 80 hours in a biweekly period is illegal because each workweek stands alone. [DOL Fact Sheet #1]
- For per diem allowances paid for travel away from home on or after October 1, 2025, the IRS high-low substantiation rates are $319 per day for high-cost localities and $225 for all other localities in the continental United States, of which $86 and $74 are treated as paid for meals. The incidental-expenses-only rate is $5 per day. [IRS Notice 2025-54]
Read the full guide to how to correct a payroll error, and the rest of the construction company payroll library.
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Frequently Asked Questions
What is the most common classification mistake in construction companies?
The IRS Construction Industry Audit Technique Guide states that the use of subcontractors is common in construction and that many taxpayers treat employees as subcontractors to avoid paying employment taxes; examiners are told to consult an employment tax specialist on these issues, and backup withholding can apply to subcontractors.
What wage and hour mistakes does DOL see in construction companies?
DOL lists these typical construction violations: not recording work before or after the shift, shorting hours as down time or rain delay, unpaid meal breaks where the employee is not fully relieved, banking overtime as comp time, failing to combine hours worked in more than one job classification in the same workweek, and not paying for travel from the shop to the work site and back.
Which construction company tax rule is most often missed?
For per diem allowances paid for travel away from home on or after October 1, 2025, the IRS high-low substantiation rates are $319 per day for high-cost localities and $225 for all other localities in the continental United States, of which $86 and $74 are treated as paid for meals. The incidental-expenses-only rate is $5 per day.
What does managed payroll cost for a construction company?
$45 per employee per month, all-inclusive, inside the payroll software you already use, with no monthly minimum. Prevailing wage compliance, certified payroll and union vs non-union are configured at setup, not billed as add-ons.
Related Resources
Anthony leads payroll solutions at Business Executive Group, a national managed payroll firm serving businesses across industries including Construction Companies. BEG manages payroll at $45 PEPM, all-inclusive, with deep expertise in compliance, multi-state filing, and industry-specific payroll requirements. Get instant pricing at beghr.com.
Authoritative source: IRS: Independent Contractor or Employee
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