For small business owners, every dollar matters. But each year, many lose money not through bad sales or missed deals—but through preventable tax mistakes. Whether it’s forgetting a form, misclassifying a worker, or missing a deadline, the IRS doesn’t offer much leniency. Even simple errors can lead to penalties, interest charges, and lost deductions.
Unlike large corporations with teams of tax experts, small businesses often handle their taxes alone or with limited support. This makes them more likely to run into problems. And when a mistake happens, the cost doesn’t just hurt your tax return—it can affect your cash flow, your ability to grow, and your peace of mind.
This article walks you through the most common tax errors small businesses make.
Table of Contents
Mixing Business and Personal Finances
It might seem easier to use one bank account or credit card for everything, especially if your business is small. But mixing business and personal money can create problems fast. When tax season comes around, you’ll have a tough time figuring out which expenses were for work and which were personal. That confusion can lead to reporting errors, missed deductions, or even an audit.
Keeping separate accounts makes it easier to track income and spending. It also helps you build a clean paper trail in case the IRS has questions.
Making Errors in Health Coverage Reporting
Some businesses are required to report health coverage under the Affordable Care Act. This includes sending out Form 1095-B and filing Form 1094-B. These forms confirm that your employees had minimum essential coverage during the year. If you make mistakes or fail to file, you could face penalties.
Following the 1094-b instructions is not always easy. They include details about who must file and how to complete the form properly. If you’re unsure whether you need to report health coverage, talk to a tax professional or check the IRS website. Filing these forms correctly is a key part of staying compliant.
Getting Worker Classification Wrong
There’s a big difference between an employee and an independent contractor in the eyes of the IRS. Classifying someone incorrectly can lead to fines, back taxes, and legal trouble. This mistake usually happens when business owners treat contractors like regular employees—by setting their hours, providing tools, or making them follow strict rules.
The IRS has clear tests to decide whether someone is truly independent. If you control how and when they work, they’re likely an employee. If they work on their own terms and have other clients, they’re probably a contractor. Misclassifying your workers might save money now, but it often leads to higher costs later.
Skipping Quarterly Estimated Payments
If you expect to owe at least $1,000 in taxes for the year, the IRS wants you to make estimated payments every quarter. Many small business owners don’t realize this or think it doesn’t apply to them. But skipping even one payment can lead to penalty charges and interest.
Quarterly payments help you stay ahead and avoid a large tax bill at the end of the year. They’re not hard to figure out—you can use last year’s numbers as a guide or work with a tax preparer. Staying on top of these payments shows the IRS you’re serious about compliance and can save you money over time.
Losing Track of Business Expenses
You can’t deduct what you can’t prove. Business expenses lower your taxable income, but only if you have good records. Too often, receipts get lost, and expenses don’t get logged. When it’s time to file, you’re either guessing or skipping deductions you could legally claim.
Simple tools can help. Apps that scan receipts, software that connects to your bank, or even a spreadsheet updated weekly can make a big difference. Staying organized throughout the year keeps your records clean and gives you peace of mind at tax time.
Missing Tax Deadlines and Paying Late
Late filing and late payments can lead to penalties that pile up quickly. Some business owners think a small delay won’t matter, but the IRS doesn’t see it that way. Even if you don’t owe much, failing to file on time can trigger fines. Interest starts building from day one, and the longer you wait, the worse it gets.
It’s important to know your key tax dates. Mark them on your calendar and set reminders a few weeks ahead. If you can’t pay the full amount, file your return anyway. That alone can lower your penalties. Planning ahead saves money and helps avoid stress when tax season hits.
Forgetting to Send Out 1099 Forms
If you pay independent contractors more than $600 in a year, you’re required to send them a 1099-NEC. You also need to file a copy with the IRS. Skipping this step—or filing it late—can lead to penalties, even if the contractor reports the income on their own.
Many small business owners forget about 1099s or assume they don’t apply. But the IRS uses these forms to track income, and they will notice if one is missing. Keep a list of all non-employees you pay during the year and track how much you spend. In January, confirm their contact details and send the forms on time.
Trusting Software Without Checking the Details
Tax software can make things easier, but it doesn’t always catch everything. These tools are helpful for basic returns, but they may miss deductions or make assumptions that don’t apply to your business. If you rely on software alone, you might overlook important details.
It’s a good idea to review everything carefully before you file. Check the entries, compare them to your records, and make sure nothing is missing. If your taxes are more complex, talk to a professional. They can help you figure out what the software missed and make sure everything is accurate.
Tax mistakes don’t always come from bad intentions. They often happen because small business owners are busy, overwhelmed, or unsure of the rules. But ignoring tax details doesn’t make them go away—it just raises the chance of costly penalties.
The good news is that most of these issues are easy to fix with the right approach. Stay organized, understand your responsibilities, and don’t wait until the last minute. If something seems confusing, ask for help before it becomes a problem. Taking these simple steps can save your business time, money, and a lot of trouble in the long run.