So, you want to be a mobile auto detailer but you’re unsure of how to start your company, how to manage your books or do your taxes? Well, you’ve come to the right place. Today’s post is brought to you by Shawn Dalton, a Certified Public Accountant in the state of Ohio. Shawn has over 5 years of experience in tax accounting/preparation and business formation.
Below, he shares a few tips for understanding taxes, deductions, and how to set up your business if you are new to mobile detailing.
Selecting a Business Entity as a Mobile Detailer
The first question that probably comes to your mind when thinking about your new business is how you should structure your entity, and that’s a great question. The options can seem overwhelming at first. You could form a partnership with your best friend, play it safe and add a layer of legal protection between yourself and the customers by setting up an LLC, or you could choose the entrepreneurial route and create a sole proprietorship.
As a beginner, you may want to begin your business as a sole proprietor, but only until you’ve proven you can build a company and sustain positive cash flows.
Beginning as a sole proprietor is relatively straight forward when compared to other options, which is why it’s one of the most common business structures in the world. It’s simple. Sole proprietorships are the cheapest & easiest entities to create.
For example, in the state of Ohio you aren’t even required to fill out any legal documents. Instead, you’re asked to register a business name with the Secretary of State for an immaterial $50 (you’re able to deduct up to $5,000 of start-up costs in your first year of business, see IRS.gov for a more detailed explanation), and obtain a 9-digit Employer Identification Number, which is used by the IRS for tax reporting purposes and that’s it!
In some states, you are only required to provide a SSN, since you are assuming ownership of the business.
Deciding Between Operating as a Sole Proprietor or Incorporating
Sole proprietorships do have one key weakness when compared to corporations. That is sole proprietors (you) and their companies are not legally separate entities. If someone files a claim against the company, he or she is filing against you. You’re 100% reliable for the debts and obligations of your company. In the worst-case scenario this could result in you losing personal assets such as your house and vehicle in order to pay company obligations.
For some, this is too much risk to bear, but for others the low start-up cost outweighs the potential for loss.
One way to help protect yourself if you do not choose to incorporate (separate yourself from the business) right off the bat is to purchase an insurance policy to help protect your personal assets. Check out our post Insurance 101 for Mobile Detailers to learn more.
Choosing an LLC as a Detailer
If you choose to form an LLC (Limited Liability Corporation), you are required to pay a one-time filing fee of anywhere from $40-$500 depending on the state you live (plus additional annual fees). LLCs offer.
You may have also heard of S-Corps and C-Corps. This is not a business structure, but instead indicates how your detailing business should be taxed. If you are the only employee, you can still form an LLC, taxed as a sole proprietor (Single-Member LLC).
Hiring Employees vs Independent Contactors
Eventually, you’ll hit a crossroads where you’re too busy to take on anymore work alone. When this time arrives, you’ll have 2 options. Either hire an employee (assuming full-time in our case) or hire an independent contractor. Both options have pros and cons, but as a price-conscious entrepreneur, we’ll focus on those differences that will most impact your bottom line. In the short-term, an employee will be more expensive. The primary reason for this is related to benefits packages.
According to the Bureau of Labor Statistics, a late 2018 study found that employee benefits cost employers an average of $11.60 per hour. That’s in addition to what you’re already paying the employee hourly or salary. Furthermore, you’re also providing your employees with all the materials and supplies needed to complete the job and taking on any costs related to training that employee.
As a result, you can exert more control over the employee via the number of hours they work, when they work and how they perform that work.
On the other hand, an independent contractor generally brings their own supplies to the job, sets their own schedule and has the potential for losses in the job they are performing. You can see how in the short-term they would be more cost-effective, which is why they’re generally hired on a project by project basis or for a short period of time.
Hiring Full-time Employees
Over the long-term, having your own employees will be more beneficial as rates will be lower and you’ll control the quality of the work performed.
In our example, we’ll assume help is needed due to organic growth that we believe will continue for the foreseeable future (if you’re just experiencing a spike in demand that you don’t think will last, then go with the contractor). Therefore, we’ll hire a full-time employee (FTE). Given we hired an FTE, there’s one more important thing that should be mentioned.
The IRS requires the withholding of city, state and federal taxes for your employee, as well as state and federal unemployment taxes, social security and workers compensation premiums to a state insurance fund. All are required withholdings/payments to the IRS or state-associated bodies.
For more details related to the differences between employees, independent contractors and tax implications you can read common law principles or visit IRS.gov.
Self Employment Taxes
Another important tax to mention is the self-employment tax. Since you’re a sole-proprietor (or even a single member LLC) you’re required to pay both the employer and employee’s share (15.3%). Of that 15.3%, 50% (7.65%) is deductible on your taxes outside of your business return, or Schedule C which we’ll talk about later. The above 15.3% is comprised of social security (12.4%) and Medicare (2.9%).
The Schedule C Tax Form
A Schedule C (Profit & Loss from your business) is the form you’ll be required to fill out for your business when filing your personal tax return. The Schedule C flows into the rest of your return. The most cost/time-efficient way to populate a Schedule C is by hiring a CPA and providing them with your ‘books’ or records of your financials.
This is where, as the CEO of your business it’s your responsibility to record & track your company’s financials.
The cleaner your books the easier it is for your CPA to find you relevant deductions. I would recommend QuickBooks Online for a start-up business due to ease of use, accessible training modules & low cost.
Deductions to Include as a Mobile Detailers
Write-offs are key for reducing the amount of income you are taxed on, so it’s important to keep track of all your receipts (either online or otherwise). Such deductions or write-offs include any supplies purchased & used for the operations.
As an auto-detailer this could include:
- Cleaning supplies (chemicals, etc.)
- One-time purchases for the business (like generators, trailers, etc.)
- Uniforms (if they are purchased for company use)
- Laundry services for your company uniforms
- Batteries if you use any electronics
- Your cell phone (if it’s company-specific)
- Fuel cost for generators
- Wages to employees
- 100% travel cost.
- Other costs directly related to running your business
Writing Off Mileage and Costs as a Detailer
You have 2 options when writing off travel costs.
- You can write off the standard mileage rate ($0.59 for every mile you drive at the time of this post)
- You track the actual cost associated with operating the vehicle. Such cost would include gas, oil, repairs, tires, insurance, licenses, registration, lease payments and depreciation.
Most people avoid the latter because it becomes very cumbersome to track, and in the event the IRS audits you, you may be asked to provide support for the amount you deducted. I’d strongly advise you stick to the standard mileage rate. Regardless of which method you use, make sure you’re consistent from year to year. Don’t change methods. That’s often a red flag for the IRS.
Not related to actual supplies mentioned earlier, other items you may write-off include:
- 50% of business meals
- Depreciation (see IRS amortization tables) for any equipment you purchase that you anticipate will provide you a benefit for greater than a year
- all advertising and promotional costs
- Business insurance
- Any interest on business loans (unless paying in advance)
- Storage costs related to a business-specific detailing vehicle
- Miscellaneous taxes paid by the business (you can deduct your state taxes on your federal return)
- Gifts to customers (not to exceed $25 per recipient per year)
- Any other cost specifically related to running the business.
Net Operating Loss Rules
There are 2 final tax implications you should be aware of as a sole proprietor preparing a Schedule C. One, net operating loss rules. You’re eligible to carryback any net operating loss from your business up to 2 years or carry it forward 20 years.
Basically, if you lost money this year, but made money last year and paid taxes on it, you can amend last year’s return and carry back this year’s loss. This would result in you getting a refund for the prior year. The same concept would apply the other way as well, but you’re just carrying the loss forward. Unfortunately, you can’t have too many of these losses consecutively.
The IRS states that if you don’t make a profit in 3 of 5 years, then your business losses are not deductible at all. It considers your business as more of a ‘hobby’, hence why they call it a hobby loss. Any losses from the hobby would be subject to a stricter set of rules that would require consultation with a CPA.
In conclusion, starting a successful business (even a sole proprietorship) is never easy, but it is achievable. I would highly recommend you consult a CPA or tax professional licensed in your state with any questions before getting started (you’ll generally be able to write off their cost as a business expense anyway!)
If you are thinking about starting a business at the beginning of the year, make sure you are saving receipts and keeping good records. It will make life much easier come tax time!
Disclaimer: The information provided in this post is purely informational and should not be used without consulting a licensed tax professional in your country or state. Carwash Country makes no guarantees and is not liable for any tax-related consequences resulting from basic information given in this post.