10 Common Small Business Tax Mistakes You Can Easily Avoid

The only thing worse than paying taxes is filing taxes. For a small business, tax filing is a byzantine and frustrating process that can feel like stabbing in the dark. Filing accurate tax forms essentially comes down to diligent and accurate record-keeping—not the strongest suit for many of us.

Using automated systems (or just maintaining good record-keeping all year long) will help you avoid the most common tax mistakes. You can automate your record keeping with Lendio’s software, an online small business bookkeeping software with a companion accounting app that eliminates these common tax mistakes that so many businesses make. 

1. Filing or Paying Your Taxes Late

We’ll start with the easiest one to avoid. File your federal and state taxes by the due date (April 15—or October 15 if you’re granted an extension). Even if you can’t pay the full amount due at the time, don’t file late because that comes with additional penalties. Paying late means interest penalties too, but it’s better to accrue as few penalties as possible.

Whether you’re filing as a sole proprietor or the owner of a small business, you’re still eligible for payment arrangements if you can’t pay on time. Those arrangements require making your payments as promised to avoid additional fees.

For self-employed 1099 contractors, your quarterly taxes are due not just in mid-April but also mid-January, mid-June, and mid-September.

2. Reporting Your Income Incorrectly

Probably the most dangerous tax mistake is to report your income inaccurately. The IRS looks very unkindly at this, and in some cases prosecutes people for fraud. Most small business owners’ mistakes are good faith errors, but it’s certainly best to avoid this risk. 

The IRS compares what you report you were paid to what other businesses and government bodies report you were paid. Generally, the IRS is going to be the judge and render the final decision on any disagreements. But if they find errors that they agree are in good faith, the agency will allow you to resubmit amended tax forms.

To avoid an IRS audit, use online accounting software to keep things up-to-date with automated, accurate monthly financial reports that keep accurate financial records throughout the year.

3. Mixing Business and Personal Expenses

Of course you’ve made a business call on your personal phone or sent a business-related email on your personal computer. But the IRS expects 100% separation between your business and personal expenses. Their iron-clad rule is that anything you write off as a business expense must be an expense that is exclusively for business. Any smartphone, computer, meal, or travel expenses you deduct must be entirely business-related.

Even those expenses cannot be deducted entirely. On meals and entertainment, for instance, you only get a 50% deduction. You can consult a real, professional accountant on some forms of accounting software for small businesses to help determine what you can write off.

4. Missing Expenses You Could Have Deducted, But Didn’t

On the upside, being diligent means you can find obscure but lucrative deductions you’ve been eligible for all along. Many small businesses don’t realize they can deduct health insurance costs or take advantage of medical reimbursements. 

One of Lendio’s bookkeeping software benefits is that it provides a tax professional to counsel you on deductions you may not know about.

5. Overreporting Your Income

It’s actually quite a common mistake to classify items like sales tax and income and report taxes as income because that’s what the total on the receipt says. But only the price of the product or service, not the taxes, can be reported as small business income. Lendio’s software offers features that separate tax from income reporting.

6. Submitting Incomplete or Inaccurate Records

In this day and age, your business records may be a hodgepodge of paper documents, emails, or online records in a vendor’s database. Add in the flurry of paper receipts you’ve accumulated, and it becomes exceedingly difficult to keep all of these records in order and in one place.

Some accounting software allows you to easily upload your records or data in a “click as you go” format throughout the tax year. Many will also generate the profit and loss statement required for the self-employment Form 1040 Schedule C.

7. Not Paying Your Taxes Throughout the Year

We mentioned earlier that self-employed contractors are required to make quarterly tax payments, not just one big payment on April 15. This schedule also applies if you’re a business partner or an S corporation shareholder. Again, those payments are due in mid-January, mid-April, mid-June, and mid-September.

8. Neglecting Your 1099-MISC Form

This one’s only for the 1099 independent contractors out there (a surging demographic), or anyone who employs them. Employers need to send 1099-MISC forms to their independent contractors by January 31 of the year after the tax year in question. Contractors who received the 1099-MISC form are required to report every penny of this income on their Schedule C form.

9. Classifying Employees’ Work Status Incorrectly 

The 1099 economy has some sole proprietors classified as business owners and other small businesses utilizing these independent contractors through business relationships. It’s important to classify workers correctly, either as employees or contractors.

Several states are changing the rules on what it means to be an independent contractor, so consult the rules on independent contractor status to determine whether you owe employment taxes or if you’re paying people as contractors.

10. Relying on Amateur Bookkeeping

You are probably not a trained accountant, but the IRS code expects you to be one. Some accounting software, like Lendio’s software, performs bookkeeping calculations for you. Lendio also has trained professionals who can give you direct feedback to your specific questions.

You’re a business person, not an accountant. But you can get real advice from real accountants if you sign up for Lendio for free to make tax time stress-free and mistake-free.

The information provided in this post does not, and is not intended to, constitute tax advice; instead, all information, content, and materials available in this post are for general informational purposes only. Readers of this post should contact their tax professional to obtain advice with respect to any particular tax matter.