Common Tax Mistakes Small Business Owners Make 

Introduction

Running a small business is hard enough — don’t let tax mistakes make it harder. In 2025, with ever-changing IRS rules and rising audit risks, many entrepreneurs are unknowingly leaving money on the table or inviting penalties.

In this guide, we’ll walk you through 10 of the most common tax mistakes small business owners make — and more importantly, show you how to avoid them with smart, sustainable solutions.

1. Mixing Business and Personal Expenses

 The Problem: Using the same bank account or credit card for both business and personal transactions creates a messy paper trail — and red flags during audits.

 How to Avoid It:

• Open a dedicated business bank account and credit card.

• Use accounting software (like QuickBooks or Wave) to categorize all expenses accurately.

Also read: Tax Planning Strategies for Small Businesses in 2025

2.  Failing to Keep Accurate Records

 The Problem: Incomplete or missing documentation makes it hard to claim deductions or prove compliance during audits.

 How to Avoid It:

• Keep digital receipts and invoices.

• Use cloud tools like Expensify or Zoho Books for real-time tracking.

• Reconcile monthly to stay current.

3.  Underestimating Quarterly Tax Payments

 The Problem: Many small business owners forget or underpay their estimated quarterly taxes, resulting in IRS penalties and interest.

 How to Avoid It:

• Calculate taxes using IRS Form 1040-ES.

• Set reminders for due dates (April, June, September, and January).

• Work with a CPA to create a realistic estimate based on current earnings.

4.  Misclassifying Employees as Independent Contractors

 The Problem: Incorrect worker classification can lead to hefty back taxes, penalties, and legal issues.

 How to Avoid It:

• Use IRS guidelines on independent contractor vs. employee.

• Use Form SS-8 to request worker status determination if unsure.

• Keep written contracts and time tracking records.

5.  Missing Deductions You Qualify For

 The Problem: Many business owners skip deductions like home office, business travel, or depreciation because they’re unsure how to claim them.

How to Avoid It:

• Work with a tax advisor to identify industry-specific deductions.

• Use tools like Keeper Tax or Hurdlr to track mileage, subscriptions, and other overlooked write-offs.

6. Filing Taxes Late or Incorrectly

 The Problem: Late filings or errors in returns can result in penalties, missed refunds, and red flags for audits.

 How to Avoid It:

• File early, not just on time.

• Double-check data entry: EINs, SSNs, expenses, and bank info.

• Use e-filing platforms like TaxAct or TurboTax Business.

7.  Not Keeping Up with Tax Law Changes

 The Problem: Tax codes change frequently, especially post-pandemic. Ignoring these changes could cost you deductions or result in noncompliance.

 How to Avoid It:

• Subscribe to the IRS Tax News.

• Join webinars from your local SBA or accounting firm. Small Business Administration (SBA).

• Schedule annual tax reviews before Q4.

8.  Overreporting or Underreporting Income

 The Problem: Inaccurate income reporting (whether accidental or intentional) can trigger audits and financial penalties.

 How to Avoid It:

• Use platforms like Xero for double-entry accounting

• Reconcile bank deposits with your invoicing tool.

• Avoid cash-based recordkeeping unless it’s tracked thoroughly.

9. Doing It All Yourself Without Expert Help

 The Problem: DIY taxes may save money upfront, but often cost more due to missed deductions, errors, or audits.

 How to Avoid It:

• Hire a tax advisor or CPA — especially if your business is growing.

• Consider fractional CFO services if your business exceeds six figures.

• At a minimum, have a professional review your return annually.

10.  Ignoring Retirement or Tax-Advantaged Accounts

 The Problem: Many business owners miss the chance to reduce tax liability through retirement plans and tax shelters.

 How to Avoid It:

• Set up a SEP IRA, Solo 401(k), or SIMPLE IRA.

• Consider HSA contributions for healthcare savings.

• Make year-end contributions before filing deadlines.