As a small business owner, your focus is naturally on growth—winning new clients, improving your product, and managing your team. But when tax season arrives, the administrative side of your business suddenly takes center stage. For many, this shift brings a wave of anxiety, not just about how much they owe, but about whether they’ve done everything correctly.
The U.S. tax code is notoriously complex, spanning thousands of pages of rules and regulations. It’s easy to make a misstep, even with the best intentions. Unfortunately, the IRS doesn’t hand out participation trophies for trying; errors on your tax return can lead to costly penalties, delayed refunds, and the dreaded audit.
Avoiding tax mistakes starts with awareness. By understanding the most common stumbling blocks, you can safeguard your business and keep your hard-earned revenue. In this guide, we’ll explore the most frequent tax mistakes small business owners make and provide actionable strategies to help you file error-free in 2025.
For a complete roadmap to a compliant tax season, including deadlines and checklists, be sure to visit our 2025 Small Business Tax Season Toolkit.
1. Mixing Personal and Business Expenses
This is arguably the number one red flag for the IRS and the most common mistake made by new entrepreneurs. When you use your business credit card to buy groceries or your personal account to pay for software subscriptions, you create a “commingling” of funds that makes accurate bookkeeping nearly impossible.
Why It’s a Problem
- Audit Risk: The IRS requires a clear separation between you and your business. If an auditor sees personal expenses mixed in with business deductions, they may disallow your deductions entirely.
- Piercing the Corporate Veil: If you have an LLC or Corporation, commingling funds can threaten your liability protection. A court could rule that your business isn’t a separate entity, making your personal assets vulnerable to business lawsuits.
How to Avoid It
Open a dedicated business checking account and credit card immediately. Treat your business finances as completely separate from your personal life. If you need money from the business, transfer a set amount to your personal account as a “draw” or salary, then spend from there.
2. Missing Filing and Payment Deadlines
In the chaos of running a business, dates can slip by. However, missing a tax deadline is one of the easiest ways to incur automatic penalties.
The Consequences
- Failure to File Penalty: The penalty for filing late is generally 5% of the unpaid taxes for each month or part of a month that a tax return is late.
- Failure to Pay Penalty: Even if you file on time, if you don’t pay what you owe, you’ll be charged 0.5% of your unpaid taxes per month.
How to Avoid It
Know your specific deadlines based on your business structure (e.g., March 16 for Partnerships/S-Corps, April 15 for Sole Proprietors/C-Corps). Set calendar alerts for weeks in advance. If you know you won’t be ready, file for an extension—but remember, an extension to file is not an extension to pay. You still need to estimate your tax liability and pay it by the original deadline.
3. Underreporting Income
It might be tempting to leave off a small cash payment or a Venmo transfer that didn’t come with a formal tax form, but underreporting income is tax fraud.
Why It’s a Problem
The IRS receives copies of the 1099 forms sent to you. Their computers automatically match these forms against the income reported on your return. If the numbers don’t match, it triggers an automatic notice and likely a bill for taxes, interest, and penalties. Furthermore, with the lowering thresholds for 1099-K reporting from payment apps, the IRS has more visibility into small transactions than ever before.
How to Avoid It
Record every single dollar of income in your bookkeeping software as soon as it is received, regardless of whether you receive a 1099 for it. Reconcile your bank statements monthly to ensure your records match your actual deposits.
4. Failing to Issue 1099-NEC Forms
Did you hire a web designer, a cleaning service, or a freelance writer this year? If you paid any non-employee $600 or more for services, you are required to file Form 1099-NEC.
Why It’s a Problem
Many business owners simply forget this step or assume it doesn’t apply to them. The penalty for failing to file a correct information return can range from $60 to $330 per form, depending on how late you file. If the IRS determines you intentionally disregarded the requirement, the penalty increases significantly.
How to Avoid It
Collect a Form W-9 from every contractor before you issue their first payment. This ensures you have their correct name, address, and Tax ID number. In January, run a report of all vendor payments to identify who needs a 1099.
5. Aggressive or Incorrect Deductions
Everyone wants to lower their tax bill, but claiming deductions you aren’t entitled to is a dangerous game.
Common Errors
- The “Everything is a Write-off” Mentality: Attempting to deduct family vacations as “business travel” or your entire mortgage as a “home office” expense.
- Vehicle Expenses: Claiming 100% business use of a personal car without a mileage log to prove it.
- Entertainment: Trying to deduct client entertainment expenses (like golf outings or concert tickets), which are generally no longer deductible under current tax law.
How to Avoid It
Stick to the “ordinary and necessary” rule. Only claim expenses that are essential for your business operations. Keep meticulous records, including receipts and mileage logs, to substantiate every claim. When in doubt, consult a tax professional.
6. Trying to DIY Your Taxes with Messy Books
Perhaps the biggest mistake of all is assuming you can fix a year’s worth of disorganized bookkeeping during the weekend before the tax deadline.
Why It’s a Problem
Rushing through a shoebox of receipts leads to errors. You will either miss legitimate deductions (costing you money) or make calculation mistakes (inviting an audit). Tax software is a tool, not a magic wand; if the data you enter is garbage, the return it generates will be garbage.
How to Avoid It
Invest in professional bookkeeping. Having organized, reconciled books throughout the year gives you a clear financial picture and ensures your tax return is based on accurate data.
Conclusion: Prevention is Cheaper than the Cure
The cost of fixing tax mistakes—in professional fees, penalties, and stress—is far higher than the cost of preventing them. By treating your tax obligations as seriously as your sales targets, you protect your business and your peace of mind.
Don’t let fear of the IRS paralyze you. Instead, arm yourself with organization and expertise. Maintain clean records, know your deadlines, and don’t hesitate to seek professional help.
Ready to ensure your business is fully prepared for the 2025 tax season? Explore our comprehensive 2025 Small Business Tax Season Toolkit for checklists, guides, and expert advice.