Common Mistakes Small Business Owners Make on Their Taxes
As a small business owner, you manage countless responsibilities—from overseeing employees and marketing to maintaining day-to-day operations. Among these duties, filing taxes accurately and on time is one of the most critical. Unfortunately, many taxpayers and business owners make avoidable errors that can lead to costly penalties, missed deductions, or overpayment.
The small business accountants from C.E. Thorn, CPA, PLLC have experience identifying the most common tax mistakes business owners make. Join us as we identify the mistakes to avoid when filing your tax returns. We aim to help our clients remain compliant and make informed decisions that can benefit their businesses.
Table of Contents
Why Common Tax Mistakes Happen
Tax season can feel overwhelming—especially when tax laws frequently change. Many taxpayers rely on tax software or attempt to file their own tax return, not realizing how easy it is to make simple math errors, overlook missing information, or fail to see eligible credits they can benefit from. Even a small oversight, such as using the wrong filing status or misreporting taxable income, may delay your tax refund or increase what you owe the federal government.
1. Choosing the Wrong Business Entity
Selecting the right entity—whether it's a sole proprietorship vs LLC or other type of business structure—may influence how much money you owe in taxes and what tax deductions are available. The business structure also determines your reporting obligations and personal liability.
Common business entities include:
- Sole Proprietorship: The simplest business structure, where one individual owns and operates the business and reports income and losses on their personal tax return.
- Partnership: Involves two or more people sharing ownership, profits, and responsibilities, with each partner reporting their share of income on their individual tax return.
- S-Corporation: Allows profits and some losses to pass directly to owners’ personal tax returns, avoiding double taxation while maintaining corporate liability protection.
- C-Corporation: A separate legal entity that pays its own corporate taxes.
- LLC (Limited Liability Company): Combines the flexibility of a partnership with the liability protection of a corporation, allowing owners to separate personal and business assets.
2. Deducting Start-Up Costs Incorrectly
Many small business owners assume all start-up expenses are deductible, but this is not always the case. The IRS generally separates start-up and organizational costs.
Start-up costs may include:
- Research, surveys, and market studies
- Travel to find suppliers or distributors
Organizational costs may include:
- State filing fees or charter documents
- Accounting or legal fees for incorporation
3. Overlooking Deductions and Tax Credits
Missing tax deductions or valuable credits can mean paying more than necessary. While it’s common to overlook small items, they add up over time.
Common deductions that may apply include:
- Meals and travel related to business
- Home office expenses (if used regularly and exclusively for work)
- Accounting and bookkeeping fees or other tax preparation expenses like filing software
- Business mileage and vehicle use
- Health and liability insurance premiums
Your certified public accountant can help identify credits and deductions that align with your eligibility and filing history.
4. Reporting Income Incorrectly
Reporting too much—or too little—income can raise red flags with the Internal Revenue Service. The IRS uses automated systems that compare what taxpayers report with what the agency receives from employers and third parties.
To avoid common mistakes:
- Include all 1099 forms, including 1099-NEC, 1099-MISC, and 1099-R.
- Reconcile all tax forms before filing electronically.
- Review whether sales tax, interest, or other items are included in your reported income.
Errors in reporting can cause the IRS to reassess your taxes or delay your refund.
5. Misclassifying Workers
Misclassifying employees as independent contractors is one of the most common tax mistakes made by business owners. The IRS evaluates factors like work hours, level of control, and supervision to determine classification. If the IRS determines workers were misclassified, you may face penalties and back unpaid taxes. Consulting a tax consultant or CPA can help you avoid errors in payroll reporting and compliance.
6. Missing Filing Deadlines or Payments
Failing to file or pay federal income taxes on time can trigger two major penalties:
- Failure-to-File Penalty: Charged when you miss the due date for filing.
- Failure-to-Pay Penalty: Assessed when taxes are filed but not paid.
Even if you can’t pay your full balance, you should still file to avoid additional interest and fines. Many taxpayers make quarterly payments to stay current and prevent a surprise balance on tax day. If you need an extension for paying taxes, you can submit Form 4868 for sole proprietors or Form 7004 for all other kinds of business entities.
7. Payroll Errors and Poor Bookkeeping Practices
Maintaining accurate and up-to-date bookkeeping records may be one of the best ways to prevent common tax mistakes. Inconsistent record-keeping can lead to human error, missing receipts, and incorrect payroll withholdings.
To help minimize your error rate:
- Keep copies of all required forms and receipts.
- Separate personal and business account numbers.
- Verify employee wages, benefits, and tax withholdings before submitting tax returns.
Working with a qualified and experienced small business CPA may simplify ongoing organization of your business' accounting records.
8. Mixing Personal and Business Finances
Small business owners sometimes use personal bank accounts for business transactions. This creates confusion when identifying deductions, verifying income, or providing documents during an audit. It’s generally required to maintain a dedicated business account with a separate routing and account number. Doing so makes it easier to reconcile transactions, monitor taxable income, and support your tax return documentation.
9. Relying Too Heavily on Tax Software Alone
While tax preparation software and e-filed returns can simplify filing taxes, they may not catch every detail. Automated systems help identify and flag common errors, but they cannot replace professional insight or knowledge of nuanced tax rules.
If you prefer to file on your own, consider having a Raleigh tax professional from C.E. Thorn, CPA, PLLC review your tax return before submitting it. This small step can help you avoid errors and ensure your tax refund is processed smoothly through direct deposit.
Tips to Double Check Before Filing Your Taxes
Even careful taxpayers may overlook simple items that delay processing. Before filing, double check:
- Social Security numbers, routing and account numbers
- All necessary forms and supporting documentation
- That your filing status and dependents are accurate
- Whether you’ve included enough postage (for paper returns)
- That your income, deductions, and credits are complete
A quick review can significantly reduce your error rate and help receive your refund faster.
Common Tax Mistakes FAQs
Does the IRS catch all tax mistakes?
The IRS uses automated systems that compare reported data from employers and taxpayers. While the IRS receives most income forms and flags mismatches, not every mistake is caught immediately. Filing electronically and reviewing entries carefully can help reduce risk.
What is the $600 tax rule?
The $600 rule generally refers to the requirement that businesses must send a 1099-NEC form to anyone paid $600 or more during the year who isn’t an employee. Failure to report these payments can result in penalties or delayed tax returns.
What is the most overlooked tax break?
Small businesses often overlook deductions related to home office use, depreciation, or continuing education. Reviewing tax laws and keeping accurate expense records may help you save more during tax season.
Partner with a Raleigh CPA for Trusted Tax Compliance
Are you a small business owner in the greater Raleigh, NC area looking for tax filing assistance? If so, C.E. Thorn, CPA, PLLC may be able to help. To see if we are a good fit for your small business tax filing needs, call us today at 919-420-0092 or fill out the form below to get started.
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