Common Tax Mistakes for Small Businesses
Running a small business comes with endless challenges, and one of the most common stress points? Avoiding tax mistakes. It’s easy to miss important details when you’re juggling day-to-day operations. And let’s be honest—taxes can get complicated fast. From keeping up with IRS tax rules to making sure you’re filing on time, small missteps can lead to big penalties or even audits. Here’s what you need to look out for.
Misclassifying Employees as Independent Contractors
One of the most common tax mistakes for small businesses is misclassifying workers. The IRS cares about whether you’re labeling employees correctly—because if you don’t, you could owe back taxes, penalties, and more.
- Employees require withholding taxes (income, Medicare, Social Security).
- Independent contractors, on the other hand, get paid the full amount, and they’re responsible for their own taxes.
The problem comes when businesses try to save money by classifying a full-time employee as an independent contractor. But if the IRS audits your business and finds you’ve misclassified workers, expect them to hit you hard with fines. Quick tip: if you control what the person does and how they do it, they’re most likely an employee.
Missing Quarterly Estimated Tax Payments
Skipping quarterly payments is a big tax mistake for small businesses. The IRS expects you to estimate your taxes for the year and pay quarterly if you think you’ll owe more than $1,000. If you don’t, you’ll owe penalties and interest.
Why does this happen? Most small business owners are focused on day-to-day operations and either forget or assume their tax software will handle it. But missing these payments can snowball quickly. To avoid it, set reminders or use accounting software like QuickBooks or Xero to track and pay on time.
Overstating Deductions
Small businesses often overstate deductions. It’s easy to think everything counts as a business expense, but that’s not always the case. Yes, deductions like office supplies, travel, and meals are allowed, but only if they’re directly related to your business.
For example, buying a new laptop for personal and business use? You can only deduct the business portion of the expense. Overstating deductions is one of the most common tax mistakes that triggers an audit. Stick to what’s real and reasonable to avoid trouble.
Legit Deductions Include:
- Office supplies (paper, pens, etc.)
- Business-related travel and accommodations
- Advertising and marketing expenses
- Employee salaries and wages
Not Keeping Detailed Records
The IRS doesn’t play around when it comes to bookkeeping. Failing to keep organized records is a common tax mistake for small businesses and can leave you scrambling at tax time. If you’re not tracking your income, expenses, and receipts, you’re setting yourself up for issues. And if you ever face an audit, poor record-keeping will make things worse.
Using a reliable system is key—whether it’s hiring an accountant or using accounting software like TurboTax. With proper records, you’ll not only be ready for tax season but also have an accurate view of your financial health.
Overlooking Payroll Taxes
Payroll taxes trip up a lot of small businesses, especially those with a growing workforce. You’re required to withhold income tax, Social Security, and Medicare taxes from employees’ wages and pay them on time. Forgetting or miscalculating these taxes can lead to hefty IRS penalties.
Even worse? If you don’t pay your payroll taxes at all, the IRS can come after personal assets. To stay on top of it, automate the process through payroll software like Gusto or hire a payroll service.
Mixing Business and Personal Finances
Another classic tax mistake? Mixing personal and business finances. It’s common for small business owners to pay for business expenses from personal accounts or vice versa. But this makes it harder to track deductions and, more importantly, raises red flags during an audit.
To avoid this, keep separate bank accounts for your business, and if you don’t already have one, get a business credit card. This makes tracking expenses a breeze and helps your case when it’s time to file taxes.
FAQs
Do small businesses have to pay quarterly estimated taxes?
Yes, if your business expects to owe more than $1,000 in taxes for the year, you’re required to pay quarterly estimated taxes. Missing these payments can result in penalties from the IRS.
What happens if I misclassify employees?
Misclassifying employees as independent contractors can result in fines and penalties from the IRS. You may also owe back taxes for Social Security and Medicare contributions.
Can I deduct personal expenses for my business?
No. Only business-related expenses can be deducted. If you mix personal and business finances, it can complicate your tax filings and trigger an audit.