Common Mistakes Small Businesses Make at Tax Time (and How to Avoid Them)

Tax season can be stressful for small business owners, but it doesn’t have to be. Avoiding common tax mistakes can save time, money, and the headache of an audit. Below are some of the most frequent errors small businesses make during tax season—along with practical solutions to help streamline the process.

Mixing Business and Personal Finances

The Mistake: Many small business owners use personal accounts for business expenses, making it difficult to track deductions and report income accurately.

How to Avoid It: Open a separate business bank account and credit card. Use accounting software to categorize transactions and ensure accurate financial records.

Poor Record-Keeping

The Mistake: Failing to maintain organized records leads to missed deductions and potential IRS scrutiny.

How to Avoid It: Keep digital and physical copies of all receipts, invoices, and financial statements. Use bookkeeping software like QuickBooks or Xero to maintain accurate records throughout the year.

State Tax Filings

The Mistake: Not filing taxes in the correct states, especially for businesses with remote employees.

How to Avoid It: Ensure you are filing state taxes where your employees live and where your business has a tax obligation. Consult a tax professional to avoid missing required filings.

Overlooking Deductions and Credits

The Mistake: Many small business owners don’t take advantage of all available deductions, such as home office expenses, capital improvements, and retirement contributions.

How to Avoid It: Research tax deductions and credits applicable to your industry. Consult a CPA to ensure you maximize all eligible write-offs.

Misclassifying Employees and Contractors

The Mistake: Misclassifying workers as independent contractors instead of employees (or vice versa) can lead to IRS penalties.

How to Avoid It: Use IRS guidelines to determine worker classification. If you’re unsure, seek professional advice to avoid costly reclassification issues.

Failing to File or Pay on Time

The Mistake: Missing deadlines for tax filings or payments can result in significant penalties and interest charges.

How to Avoid It: Mark key tax dates on your calendar and set reminders. Consider working with a tax professional to ensure timely filing and payments.

Underreporting Income

The Mistake: Some businesses, whether accidentally or intentionally, fail to report all their income, which can raise red flags and lead to an audit.

How to Avoid It: Ensure that all business income is accurately reported, including cash transactions, digital sales, and third-party payments (e.g., PayPal, Venmo). Use accounting software to track and reconcile income regularly, and maintain a record of all 1099 forms received.

Neglecting Payroll Tax Obligations

The Mistake: Business owners who handle payroll incorrectly—such as failing to withhold taxes or misreporting wages—face IRS penalties.

How to Avoid It: Use a payroll service or consult with a tax expert to ensure compliance with payroll tax regulations.

Forgetting to Back Up Financial Data

The Mistake: Losing important financial documents due to a system crash or accidental deletion can cause major issues at tax time.

How to Avoid It: Regularly back up financial data to a secure cloud storage solution and keep paper copies of essential documents.

Trying to Do It All Alone

The Mistake: Many business owners attempt to handle taxes without professional guidance, increasing the risk of mistakes.

How to Avoid It: Work with a CPA or tax professional to ensure accuracy and compliance. Their expertise can help you save money and avoid costly errors.

Final Thoughts

Proactively managing your tax responsibilities throughout the year will make tax time much smoother. By keeping accurate records, making timely payments, and seeking professional guidance, small business owners can minimize stress, reduce errors, and avoid unnecessary penalties.

Whittlesey specializes in helping small businesses navigate tax season with confidence. Whether you need assistance with tax planning, compliance, or financial strategy, our experienced team is here to help. Contact us today to ensure your business is prepared for tax season—and beyond.