10 Devastating Tax Mistakes Small Business Owners Consistently Make

Man frustrated over finances holds up a help sign

Every year, businesses large and small must confront the dreaded day that taxes are due.

Chances are, it causes you anxiety every year. I’ve been an accountant for a long time, and I’ve seen the terror in the eyes of hundreds of clients—often due to past tax mistakes that have cost them big time.

But I’m here to tell ya, anxiety and sleepless nights don’t have to be a byproduct of tax season! Below you’re going to find the top 10 tax mistakes I see clients make again and again. You probably don’t even realize what a profound, on-going headache these tax mistakes are causing you, year after year. But don’t worry. I’ve got the answers you need to make tax season less stressful.

1. Mixing Personal and Business Finances

Seems pretty straightforward, right? Believe it or not, tons of clients come to me with massive problems that could have been avoided if they’d simply separate their personal and business finances. Now, if that’s you — don’t worry. I’m not judging here. We’ve all done it. Keeping your finances together just seems easier when you first start a business—there are already so many things to consider, so you put a business bank account on the back burner.

If you’re thinking, “Do what? I don’t do any mixing of that sort,” think about this. Do you ever…

  • Pay vendors or freelancers from your personal account claiming you’ll reimburse yourself “later”?
  • Put personal expenses, like groceries, on your business card?
  • Buy merchandise with your personal funds?
  • Pay rent from one account that combines personal and business funds?
  • Treat a client to drinks, using your personal debit card?

The biggest reason why you shouldn’t be mixing personal and business finances is that it complicates your taxes. It also makes it a lot harder to track your profitability, and — hate to say it — it wastes a lot of time. It may seem like a pain but separating personal and business finances will save stress and possible tax mistakes later.

2. Fudging Home Office Deductions

We’ve all been there. You think you can get away with something, big or small, and the IRS won’t single you out. I mean, c’mon. Why would they come after me? There are lots of bigger fish out there that they’d go after first, right?

Yeah, but the problem is that we all think that. Until they DO come after us.

If you’re a small business owner, you probably know a bit about the home office deduction hack. And if you don’t, I’m about to cover it.

Working from home qualifies you to take a home office tax deduction. That’s all fine and dandy — I encourage my clients to go for any deduction they’re allowed. But that’s the keyword: allowed. If it’s legit, take it. But if you’re trying to fudge a deduction, it’s not worth the risk.

On the flip side, if you DO work exclusively and regularly in your house, you deserve to claim that as a tax deduction. Why? Because you’re paying for things out of pocket — Wi-Fi, home desk, headphones, keyboard, laptop, and so on. Plus, you’re dealing with some substantial inconveniences that you wouldn’t deal with if you were in a standard office—furry friends walking on your keyboard, kiddos hollering for a snack, and a washing machine that forces you to mute yourself on Zoom calls.

Some home office deductions are tricky. If you aren’t sure if some of yours qualify, just ask us. We’ll give you the low-down.

3. Procrastinating on Bookkeeping

This one’s quick and dirty. Keep up with your bookkeeping. It’s not there to be ignored — you’re going to have to do it at some point, so why not keep up rather than catch up? Most entrepreneurs see it as a chore, but you know what’s even worse? Scrambling at the last minute to wrangle all your receipts and try to get everything finished in time. It’s a damn nightmare. So just keep up with it throughout the year — plain and simple. When you are rushed and stressed, tax mistakes are going to happen!

4. Filing Taxes Without Preparation

Another nightmare: filing your taxes. Every. Single. Year. I know, I hear you. But it has to be done. So, rather than wait until the last minute (again) and do the bare minimum with filing taxes, why not hand it over to a pro?

My advice: Hire an expert. Plan it out. Pick their brain. I love when clients come in to plan their taxes several months before taxes are due. Want to know why? Because that’s when we can get your money’s worth. That’s when we can figure out how much you really owe and how much you deserve to write-off.

5. Not Thinking About Startup Expenses

Starting a business brings on a whole world of new expenses, and hopefully, a whole world of profits. But not paying attention to those hidden costs can really kill your mojo, and it’ll come back to haunt you when you least expect it. From loans to tech expenses and everything in between, you’re going to have mounting expenses. And not all of them will be in your face. If you recently started your business, it’s never too soon to talk to an expert to make sure you account for all your expenses from the start.

6. Forgetting About Retirement Plans

Contributing to a retirement plan is a smart, simple way to reduce your tax liabilities. Oh, and of course… to plan for the future! Duh. But seriously, any accountant will tell you that this is tax reduction jackpot — and you’re missing out if you’re not making some sort of contribution. Today’s benefits landscape is pretty competitive, so when you’re thinking about the types of benefits you’ll give to your employees, you’ve got to realize that they’re going to expect some sort of retirement plan contribution. Happy employees = happy business.

7. Waiting Until the Last Minute

We’re going to talk about every accountant’s WORST nightmare: clients waiting until the last minute to file taxes. And worse (if that’s even possible), not filing taxes at all. Accounting rule #1: Pay your taxes. You may have to file for an extension (totally okay!), or you may need to get help from an expert (even better), but not paying is never a solution—it ALWAYS catches up with you!

I know there are hundreds of distractions—things that can cause you to procrastinate filing your taxes. You see the deadline is April 15th, so you make a note in your calendar for April 14th to submit your taxes. Heck, maybe you book it a week in advance. Either way, you’re pushing off the inevitable.

Although it sounds like a relief to push off paying taxes, this leaves you cramped on time and, eventually, on money. That’s right, pushing off your taxes means less time spent scrutinizing them and understanding how much you really owe. If you gave it a little more time and effort, you could be finding deductions that will save you the big bucks. Note: We’re about to talk about tax write-offs and do some debunking — so don’t leave just yet. Before you think I’m giving contradicting advice, give #8 a read.

8. Making Business Decisions Simply for The Tax Write-off

As you probably know, a tax write-off is a cool way of saying a tax deduction. So, if you owe $10,000 in taxes but you have a few write-offs, you may only owe $9,000. Or maybe even $8,000. Sign me up, right?!

I’m all about deductions because, as an accountant, I know damn well that taxes can be a beast. And you should be paying what you owe—but only what you owe. So, if you deserve to take a deduction, take it!

That being said, you should never make a big business decision based solely on the fact that you can claim it as a deduction later. Every year I see clients make these types of tax mistakes. They create more work for themselves by trying to “game” the tax system. If an expensive purchase would provide your business with a huge ROI, and it’s tax-deductible, then you can consider it. If it doesn’t fit that criteria, resist the temptation.

9. Disregarding Mileage Tracking

Let me guess. You’ve used your personal car for business ventures, and you footed the bill with your own money. You probably passed it off as an expense you were willing to pay out of pocket to avoid the hassle of tracking your mileage. Rookie tax mistake, my friends.

It may feel like you’re not working because you aren’t schmoozing with clients or sitting behind your computer, but if you are out running errands for your business, you should track those miles. It’s worth taking a minute to write down odometer numbers if it means it will save you bucks come tax time. Sure, it may seem like a measly amount — but those jaunts across town add up to lots of miles over the course of a year. And heck, there’s an app for that!

10. Employee Misclassification

Here’s one of the more recent tax mistakes that will really hurt you if you don’t pay attention to it. Misclassifying your employees and their income is a big no-no. Some small business owners think it’s okay to label their employees as independent contractors, but I’m here to tell you: Don’t do it! Even accidental misclassification of staff is considered tax evasion! You will get caught eventually!

I get it—classifying an employee as an independent contractor can save around 30% of your labor costs—one of the heftiest prices of doing business. The thing is, though, that governments are really cracking down on this as the new “gig economy” explodes. Depriving the government of these monies owed has far-reaching impacts on things like public services and unemployment insurance. If your business is hurting, find another way to cut costs. Or come to an accountant you can trust 😉 and let us find legit tax deductions that won’t cause you to end up owing a shit-ton of back taxes and fines!

Avoiding these common tax mistakes will not only ease your mind, but they will also save you money in the long run. Tax penalties and fines cause entrepreneurs millions of dollars every year, and it’s so unnecessary!

Still worried about making tax mistakes? Let us help you whip those numbers into shape without breaking a sweat!

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Michelle Cooper

Michelle Cooper is a powerhouse entrepreneur, CEO of Alchemy Accounting & Bookkeeping, author of Confessions of a Money Rock Star, Your MoneyDate Journal, and co-author of the collaborative book, Women Rising. She has helped many business owners climb out of entrepreneurial poverty into the land of profit.