Common Tax Mistakes Business Owners Should Avoid

Common Tax Mistakes Business Owners Should Avoid

Running a business comes with many responsibilities, and taxes can be one of the most complicated. Unfortunately, many business owners unknowingly make mistakes that could cost them, whether in missed deductions, penalties, or unnecessary stress during tax season. Let’s explore the most common tax mistakes and how you can avoid them.

1. Mixing Personal and Business Finances

Many business owners make the mistake of not separating their personal and business finances. This not only complicates bookkeeping but also puts you at risk if the IRS decides to audit your business. If your personal and business finances are mixed, it can be difficult to prove which expenses are truly business-related, which may lead to disallowed deductions and penalties.

Tip:

  • Open a dedicated business bank account and use it exclusively for business transactions. This makes it easier to track expenses and file accurate tax returns.
  • Keep personal and business receipts and expenses separate. When you pay for a business expense using personal funds, reimburse yourself through the business account, making sure to document the transaction.
  • At tax time, your business will benefit from a clearer picture of its financials, and you’ll have an easier time proving your deductions are legitimate.

2. Failing to Properly Classify Workers

Misclassifying workers as independent contractors when they should be classified as employees is a common tax mistake for business owners. The IRS closely monitors worker classification because it affects how taxes are paid and benefits are provided. Misclassification often happens when business owners try to avoid payroll taxes and benefits by classifying employees as contractors.

IRS Guidelines on Worker Classification

According to IRS Publication 15-A, worker classification is based on the level of control you have over the worker. The IRS uses three main categories to determine classification:

  • Behavioral Control: Do you control how, when, and where the worker performs their job? Employees are subject to more control over how they complete their tasks. Independent contractors generally have the freedom to determine how they work, the tools they use, and when they complete the job.
  • Financial Control: Do you control the financial aspects of the worker’s job? Employees are often paid on a regular schedule (e.g., weekly or biweekly) and may receive benefits like insurance or retirement plans. Independent contractors typically receive payment upon completion of a job or on a per-project basis. They also often have unreimbursed business expenses and invest in their own equipment or tools.
  • Type of Relationship: Is there a written contract or agreement between you and the worker? Employees generally have a more permanent relationship with the business, and their work is a key part of the business. Contractors, on the other hand, are typically hired for specific tasks or projects and are free to provide services to other businesses as well.

Tip:

  • Use these guidelines to ensure you’re classifying your workers correctly. Misclassification can result in back taxes, penalties, and potential lawsuits.
  • If you’re unsure about how to classify a worker, consult with a tax professional to avoid mistakes that could lead to costly penalties.

3. Not Keeping Adequate Records

Good recordkeeping is essential for managing taxes, but many business owners fail to keep thorough documentation of income, expenses, and deductions. This can lead to missed tax deductions or, worse, issues during an IRS audit.

Tip:

  • Keep all receipts, invoices, and financial records organized. Consider using digital tools or apps to scan and store receipts.
  • Maintain detailed records for deductible expenses such as meals, travel, and office supplies. Without proper documentation, the IRS may disallow these deductions during an audit.
  • Consider working with a bookkeeping service to stay organized throughout the year and avoid scrambling during tax season.

4. Missing Deadlines for Tax Payments

Many business owners forget or miss the deadlines for making quarterly estimated tax payments. If you underpay your taxes throughout the year, you may face penalties when you file your return. The IRS expects business owners to pay taxes on an ongoing basis, not just at the end of the year.

Tip:

  • Mark quarterly estimated tax deadlines on your calendar: April 15, June 15, September 15, and January 15.
  • Use accounting software to automatically calculate and remind you of your quarterly tax payments.
  • Consider hiring a tax professional to manage your tax payments, ensuring they’re made on time and in the correct amount.

5. Failing to Depreciate Assets Correctly

If your business purchases large assets like equipment or property, it’s important to depreciate these assets over time. Many business owners either fail to depreciate correctly or try to deduct the entire expense in the year of purchase, which can lead to problems.

Tip:

  • Follow the IRS guidelines in IRS Publication 946, which explain how to depreciate assets over their useful life. This allows you to spread out the deductions and claim them in smaller portions each year.
  • Keep detailed records of when assets were purchased and begin depreciating them in the first year of use.
  • Work with an accountant or tax advisor who can help you correctly depreciate your assets and maximize your deductions.

6. Not Taking Advantage of Available Deductions

There are many deductions available to business owners, but not everyone takes full advantage of them. From home office expenses to business travel, missing out on these deductions can mean paying more in taxes than necessary.

Tip:

  • If you work from home, the home office deduction allows you to write off a portion of your home’s expenses (such as utilities and mortgage interest) based on the percentage of your home used for business.
  • Deduct business travel, meals, and other related expenses, but ensure that you keep clear records and only deduct legitimate business expenses.
  • Speak with a tax professional who can help you identify and claim all the deductions you’re entitled to, ensuring that you’re not leaving money on the table.

7. Not Seeking Professional Tax Advice

Perhaps the biggest mistake business owners make is trying to handle their taxes entirely on their own. While it’s possible to file your own taxes, tax laws are complex, and even minor mistakes can lead to significant financial consequences.

Tip:

  • Work with a trusted tax professional or CPA who can help you navigate complex tax issues, ensure compliance, and identify ways to save on your taxes.
  • Schedule regular consultations with your tax advisor to review your financials and tax planning strategy throughout the year.


By being aware of these common tax mistakes and taking steps to avoid them, you can save money, reduce your tax burden, and avoid penalties. Running a business is hard enough—don’t let tax mistakes hold you back. At 9FIFTEEN Accountants, we specialize in helping business owners manage their taxes and bookkeeping, ensuring that you stay on track and avoid costly mistakes.

Contact us today to schedule a consultation. Let us help you stay organized, compliant, and confident in your business’s financial health.


At 9FIFTEEN Accountants, we’re dedicated to helping business owners streamline their finances and maximize deductions.

Post Tags :