Kevin A. Nye – Fractional COO, Small Business Consultant

Running a small business is no small feat. Between managing staff, serving customers, and keeping everything running smoothly, taxes can quickly fall to the bottom of the to-do list. But ignoring or misunderstanding your tax responsibilities can cost you big time. Following are the most common mistakes small business owners make when it comes to taxes. We’ll break down how to fix them, prevent future problems, and make tax time a whole lot less stressful. Whether you’re just starting out or have been running your business for years, there’s a good chance you’ll find something here that can help you keep more of what you earn. Mistake #1: Not Separating Personal and Business Finances This is one of the most common and costly tax mistakes small business owners make. Mixing personal and business expenses might seem harmless at first, especially when you're the only employee, but it creates a messy trail for the IRS. And for you. Why it matters:You need a clean paper trail to deduct business expenses. If you’re using one bank account for everything, it’s hard to prove which expenses are business-related. That means you may miss out on legitimate deductions or raise red flags during an audit. The fix: Open a separate business checking account and credit card. Always pay for business expenses from your business account. Record all income and expenses in your bookkeeping software, with receipts. Mistake #2: Misclassifying Workers Another mistake that lands small business owners in hot water is misclassifying employees as independent contractors. The difference is more than just paperwork. It affects payroll taxes, benefits, and liability. Why it matters:If you misclassify an employee, you could be liable for unpaid payroll taxes, back wages, and penalties. The IRS takes this seriously, and so do state agencies. The fix: Use the IRS guidelines (Form SS-8) to determine whether someone is an employee or contractor. When in doubt, consult a tax professional or employment attorney. If they’re an employee, you must withhold and pay payroll taxes. Mistake #3: Missing Quarterly Estimated Payments Many new business owners assume taxes are due once a year. But if you're self-employed or your business is profitable, the IRS wants its cut throughout the year in the form of quarterly estimated tax payments. Why it matters:Failing to make these payments can lead to interest and penalties, even if you pay your full amount at the end of the year. The fix: Use IRS Form 1040-ES to calculate and pay your estimated taxes each quarter. Put tax money aside every month based on your income. Use accounting software or work with a CPA to make sure you’re on track. Mistake #4: Overlooking Deductions Too many small business owners leave money on the table by not claiming deductions they’re entitled to. Sometimes they don’t know what qualifies. Other times they’re afraid of triggering an audit. Why it matters:Business deductions reduce your taxable income. If you're not taking full advantage of them, you're likely overpaying. Commonly missed deductions: Home office expenses (if used regularly and exclusively for business) Business mileage and travel Software and subscriptions Meals with clients (typically 50% deductible) Professional services like legal or accounting help Equipment and supplies Marketing and advertising costs The fix: Keep detailed records and receipts. Track mileage with a log or app. Don’t guess. Talk to a tax pro to understand what you can and can’t deduct. Mistake #5: Not Saving for Taxes Cash flow can be tight, especially for newer businesses. But not setting aside money for taxes is a disaster waiting to happen. Why it matters:Come April, if you owe more than expected and haven’t saved for it, you may have to dip into operating funds or go into debt. That creates stress and can snowball into bigger financial trouble. The fix: Save 25% to 30% of your net income in a separate “tax” account. Schedule monthly or quarterly tax reviews. Build taxes into your pricing model so you’re always accounting for them. Mistake #6: Poor Recordkeeping Many business owners assume their accountant or tax software will sort everything out at the end of the year. But if your records are incomplete or inaccurate, even the best CPA can’t help you much. Why it matters:Without good records, you may miss deductions, fail to back up claims, or even file incorrect returns. The fix: Use bookkeeping software like QuickBooks, Xero, or Wave. Reconcile accounts monthly. Store receipts digitally for easy access and to avoid lost paperwork. Mistake #7: Failing to Plan for Self-Employment Taxes Self-employed business owners are responsible for paying both the employer and employee portion of Social Security and Medicare taxes. That adds up to 15.3% on top of regular income tax. Why it matters:If you only budget for income tax, you’ll be shocked at how much you owe come tax time. The fix: Understand your total tax liability (income tax + self-employment tax). Factor this into your quarterly estimates. Consider forming an S Corp once you’re earning enough, which may reduce self-employment tax. Mistake #8: Ignoring State and Local Taxes Federal taxes get most of the attention, but state and local tax requirements can be just as important, and just as confusing. Why it matters:Sales tax, franchise tax, and state income tax vary by state and industry. Ignoring them can lead to big penalties. The fix: Check with your state tax agency about requirements for your type of business. Make sure you have the right business licenses and sales tax permits. If you sell online, look into economic nexus laws, which may require you to collect sales tax in other states. Mistake #9: Filing Late or Not at All Some business owners dread taxes so much that they avoid them altogether. But ignoring your tax responsibilities doesn’t make them go away. It just makes the problem worse. Why it matters:Late filings can lead to penalties and interest that snowball fast. Not filing at all can trigger serious legal trouble. The fix: Mark key deadlines on your calendar. File on time, even if you can’t pay in full. If you need more time, file for an extension using IRS Form 7004 (for businesses) or Form 4868 (for personal returns). Mistake #10: Not Getting Professional Help Trying to save a few hundred dollars by doing your own taxes might seem like a smart move, until it costs you thousands in missed deductions or penalties. Why it matters:Small business taxes are complex. A good CPA or tax advisor can help you save money, reduce risk, and focus on running your business. The fix: Find a tax professional who specializes in small businesses. Have them review your finances at least once a year. Ask questions. A great advisor should help you understand your numbers, not just file your returns. Final Thoughts: Taxes Are Part of the Business, Not Just a Burden It’s easy to feel overwhelmed by taxes. But the more you understand and stay on top of them, the more confident and profitable you’ll be. You don’t have to be a tax expert, but you do need to know where the traps are. The most successful small business owners treat taxes as part of their overall financial strategy, not an afterthought. Keep your records clean. Pay on time. Ask for help when you need it. And remember, avoiding these common mistakes isn’t just about staying out of trouble. It’s about keeping more of what you earn and building a stronger business.

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