Friday 14th February 2025
Taxes can be one of the most stressful parts of running a small business. Mistakes in tax preparation or filing can lead to penalties, audits, and unnecessary headaches. Understanding common errors and how to prevent them can save small business owners time, money, and frustration. Here are the top mistakes small business owners make with taxes and actionable tips to avoid them.
1. Mixing Personal and Business Expenses
The Mistake: Combining personal and business expenses is a common error, especially for sole proprietors or new business owners. This can lead to inaccurate record-keeping and make it harder to track deductible expenses.
How to Avoid It:
Open a separate business bank account and credit card to keep finances distinct.
Use accounting software to categorise expenses correctly.
2. Failing to Keep Adequate Records
The Mistake: Many small business owners neglect proper documentation, such as receipts, invoices, and mileage logs. This can result in missed deductions and issues during audits.
How to Avoid It:
Use cloud-based accounting tools to store and organize receipts digitally.
Develop a habit of recording transactions daily or weekly.
Maintain organised folders for tax-related documents.
3. Misclassifying Employees and Contractors
The Mistake: Misclassifying workers as independent contractors when they should be employees can lead to significant tax penalties.
How to Avoid It:
Familiarise yourself with IRS guidelines on employee vs. contractor classifications.
Consult a tax professional if you're unsure about how to classify workers.
4. Missing Estimated Tax Payments
The Mistake: Business owners who don't withhold taxes from paychecks often forget to make quarterly estimated tax payments. This can lead to penalties and interest.
How to Avoid It:
Calculate your estimated taxes based on the previous year’s earnings.
Mark quarterly payment deadlines on your calendar.
Set up reminders or automate payments.
5. Overlooking Deductions and Credits
The Mistake: Many small businesses miss out on tax deductions and credits they are eligible for, such as home office expenses, vehicle mileage, or the qualified business income deduction.
How to Avoid It:
Research common deductions for small businesses.
Keep detailed records of all potential deductible expenses.
Work with a tax professional to ensure you’re claiming all eligible deductions and credits.
6. Incorrectly Calculating Depreciation
The Mistake: Miscalculating depreciation on business assets can result in inaccurate tax filings and missed opportunities for deductions.
How to Avoid It:
Use accounting software with built-in depreciation calculators.
Consult with an accountant to properly record and depreciate assets.
7. Filing Late or Not Filing at All
The Mistake: Filing taxes late or not at all can trigger hefty penalties and interest charges from the IRS.
How to Avoid It:
Mark tax deadlines on your calendar or use digital reminders.
Start preparing for taxes early to avoid last-minute scrambling.
If you need more time, file for an extension before the deadline.
8. Not Consulting a Professional
The Mistake: Relying solely on DIY tax preparation can lead to errors, especially as tax laws change frequently.
How to Avoid It:
Hire a qualified tax professional, especially if your business has complex tax needs.
Consider working with a CPA who specializes in small business taxes.
9. Failing to Plan for Tax Season
The Mistake: Many small business owners only think about taxes during tax season rather than planning year-round.
How to Avoid It:
Conduct quarterly financial reviews to ensure you’re on track.
Set aside a portion of each month’s revenue for taxes.
Stay informed about any changes in tax laws that may impact your business.
Avoiding common tax mistakes is crucial for small business success. By staying organised, planning ahead, and seeking professional advice, small business owners can reduce tax-related stress and ensure they remain compliant. Taking these proactive steps not only helps avoid penalties but also maximizes deductions and improves overall financial health. For peace of mind and more time to focus on growing your business, make taxes a year-round priority.
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