Are You Making These Costly Auto Shop Accounting Mistakes?

Simple accounting mistakes can impact your auto shop more than you realize. Rather than having additional funds at the ready to allocate towards business growth, you’re left scrambling trying to pick up the pieces of your accounting mishaps. However, mastering auto shop accounting is no small feat:

• It requires a thorough understanding of accounting language and bookkeeping practices, basic tax laws, how to analyze financial statements — and make decisions based on that information — and the principles of cash flow management.
• Kaizen can help! Accounting is one of the most difficult areas of business. It also has the potential to damage your reputation and success if you get it wrong. With the help of Kaizen's trusted CPAs, our automated solutions, and a reliable auto repair shop management software, your auto shop will be well on its way to balancing financials and gaining profits. 

To ensure your accounting is up to par, here are the top auto shop accounting mistakes you'll want to avoid this year to increase your profits and grow your business. 

MISCLASSIFYING INDEPENDENT CONTRACTORS AS EMPLOYEES

Employees vs. Independent Contractors — what's the difference?

First and foremost, independent contractors are generally defined as individuals who work for themselves and usually work on a project-by-project basis. Think of them as freelancers of the business world. On the other hand, an employee works for an employer that controls everything from when they get the work done to how it's done. 

If you think you have a contractor but they actually meet the criteria to be classified as an employee, that could result in serious penalties and fines if your company gets audited by any number of federal and state government agencies. In fact, the 2021 misclassification update notes that employers could be subject to $50 for each W-2 that wasn't filed, a penalty based on wages (up to 3%!), up to 40% of the FICA taxes that should've been withheld from the misclassified employee, and 100% of those taxes that you should've matched. 

NOT FILING PAYROLL TAXES

Payroll taxes are the funds you contribute to the Internal Revenue Service (IRS) on behalf of your employees. These funds help pay for social security and Medicare benefits.

When you withhold payroll taxes from your employees’ checks, it is your responsibility as an employer to contribute those amounts to the IRS through a 941 tax form. This tax form is filed quarterly, four times per year.

The IRS can charge significant penalties for failing to file payroll taxes on time or at all. When you file late, you should expect one or more of the following payroll tax penalties:

• One to five days late — 2% of unpaid taxes
• Six to 15 days late — 5% of unpaid taxes
• More than 16 days — 10% of unpaid taxes
• PLUS interest on unpaid balances

These fines can destroy a business if they go unchecked because they add up quickly. If you have not filed payroll taxes in the past, talk with a licensed CPA about how to resolve tax debt issues with the IRS without compromising your business's future.

TRACKING INVENTORY INCORRECTLY

Humans are hardwired to be good with numbers. Our ancestors probably made it through their winters by keeping track of the number of days they slept, the number of steps they took, and the number of berries they gathered. It's in our DNA to have a strong appreciation for numbers and how things add up — and that goes hand in hand with our innate need to take inventory seriously.

Inventory errors can cost you thousands of dollars if you aren't careful. As a shop owner, part of your job is to ensure that all items in your shop are accounted for at all times. Even if an item gets misplaced, it's important to track where it went so you know what items need to be ordered or sold off before something gets lost forever.

Incorrectly accounting for inventory could also artificially inflate or reduce your gross profit on parts sold. If you don't accurately count your inventory, especially for current jobs that are incomplete, you could be accounting for an expense in which income hasn’t been recognized yet.

Not tracking inventory can also make your shop subject to theft or waste from your staff. If you don't have a system or process to ensure that all parts are accurately tracked and reconciled to a repair order, there is no stopping employees from walking off with parts, side-work, or freebies. 

Shop owners should ensure that all parts and supplies that will be attached to a vehicle are added to a repair order. If the purchases exceed the items attached to repair orders, you may have a theft or waste issue.

USING THE WRONG SHOP MANAGEMENT SOFTWARE

Choosing a shop management software is an important task. It can help your business with estimating, invoicing, and repair order tracking. However, it's not as simple as choosing just any business software.

You should choose software that is tailored to auto repair shops.

This will help you better manage your accounting and customer information by giving you the specific features necessary for running an auto shop, such as parts and labor catalogs, vehicle history searches, technician time-tracking capabilities, customer reminders via email or text message, and more.

UNDERESTIMATING TAX DEDUCTIONS

Tax deductions are a major benefit of owning a business because they allow you to deduct certain expenses from your taxable income. Shop owners can deduct many things that they pay for, including:

• Shop furniture, computers, and office supplies
• Cell phones and utilities
• Vehicle expenses, including gas, repairs, and insurance
• Advertising and marketing expenses
• Salaries or wages paid to employees
• Contributions you made to certain retirement plans or health savings accounts
• Up to $1 million in equipment purchases each year using the Section 179 deduction

If you keep detailed records of your vehicle mileage throughout the year, you can deduct miles driven for business purposes at the current IRS rate of 58.5 cents per mile when filing your 2022 return in 2023. For instance, if you drive 5,000 miles for business over the course of 2022, you can claim a $2,925 deduction when filing in 2023.

Get into the habit of logging when and where you drive for business to maximize this deduction.

Compensating Yourself Incorrectly

An owner of a shop can compensate themselves in several different ways. This could include salary, dividends, distributions, fringe benefits, and rental of personally owned real estate.

Although all of these items end up putting more money into the owner's pocket, they all have different tax attributes to them. Not ensuring that you have the most efficient structuring of these items could cost you thousands of dollars in both tax owed and the value of your shop.

NOT TRACKING BUSINESS EXPENSES

It is critical for every small business owner to keep track of expenses, but it's especially important if you operate an auto shop.

Not only do you need to track expenses to calculate your profits and make sure you are profitable, but keeping tabs on your business expenses also allows you to claim tax deductions and make sure that you aren't overpaying for supplies or services.

If you don't have a system in place for tracking expenses at this time, don't panic — there are plenty of ways that you can get started.

NOT HIRING AN AUTOMOTIVE ACCOUNTANT

Perhaps you're thinking, "Sure, but how is hiring an accountant worth the investment?" Well, for starters, professional accounting services can provide specialized knowledge and time savings that can help improve efficiency, reduce stress and even increase profitability.

When it comes to your shop's finances, little things like a misplaced decimal point or omission can have big consequences on your bottom line. Mistakes like these can also be compounded when you use the wrong accounting methods throughout the year—comparing apples to oranges as opposed to apples to apples.

This means crunching numbers without knowing if you're actually making money (or losing it) in each area of your business.

Luckily for us all, accountants usually have a passion for numbers and are well-versed in those hard-to-remember rules, so you don't have to worry about them! And when accountants do their job right, they make sure that their clients' books are accurate and up-to-date so they can focus on what they do best: running their own shops.

The end result? You get better financial decisions based on reliable data rather than vague ideas or gut feelings!

ARE YOU MAKING THESE COSTLY ACCOUNTING MISTAKES?

Poor accounting can negatively affect your auto repair shop in many ways, from direct monetary impacts like penalties and fees to the sales impacts of having a bad reputation. After all, customers won't find it easy to trust you to take care of them if you can't take care of yourself. 

So, ask yourself the following:

• Do I know the difference between gross receipts and net income?
• Am I having difficulty managing cash flow?
• Do I have a lack of understanding of my business's financial health?
• Are my financial records inaccurate?
• Do I understand what I can and cannot deduct as a business expense for tax purposes?

If any of these challenges sound familiar, click 'Let's Chat,' and let's work together to get your auto repair shop back on track and thriving!

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