Biggest Tax Mistakes Small Business Owners Make

These are common and costly mistakes for owner-run businesses, from new LLCs to established trades and professional practices. Each one is described with the rule that applies for tax year 2026 and a link to the IRS or state source. None of them requires a sophisticated fix; most are solved with a calendar, a separate bank account and a monthly close.

1. 01

   1. Skipping or underpaying quarterly estimated taxes

   Best for: Sole proprietors, partners and S corporation owners with profits not covered by withholding

   The IRS says individuals generally must make estimated payments if they expect to owe $1,000 or more when they file. For 2026 the federal due dates are April 15, June 15 and September 15, 2026, and January 15, 2027. Paying at least 90% of this year's tax or 100% of last year's tax generally avoids the underpayment penalty, and higher-income taxpayers must use a larger percentage of last year's tax.

   • $1,000 expected balance due triggers estimates
   • Four due dates, including January 15, 2027
   • Prior-year safe harbor protects growing businesses
   Read more →
2. 02

   2. Mixing personal and business money

   Best for: New owners and single-member LLCs

   Paying personal bills from the business account, or business costs from a personal card, makes deductions harder to prove and bookkeeping slower. It also weakens the separation an LLC or corporation is supposed to provide. Open a business-only account and card, pay yourself by a clear owner draw or payroll, and reconcile monthly.

   • One business account and one business card
   • Owner draws or payroll, not ad hoc transfers
   Read more →
3. 03

   3. Misclassifying workers as contractors

   Best for: Businesses that pay helpers, crews or assistants

   Whether someone is an employee or an independent contractor depends on behavioral control, financial control and the type of relationship, not on what the agreement calls them. The IRS says there is no set number of factors that decides it. Misclassification can leave the business owing employment taxes; the IRS offers Form SS-8 determinations and a Voluntary Classification Settlement Program for businesses that want to correct course.

   • Three categories: behavioral, financial, relationship
   • Form SS-8 for a formal determination
   • Voluntary Classification Settlement Program for corrections
4. 04

   4. Using the old $600 rule for 1099s, or skipping W-9s

   Best for: Anyone paying contractors, landlords or attorneys

   For payments made after December 31, 2025, the Form 1099-NEC and 1099-MISC reporting threshold is $2,000, and the IRS says it may be adjusted for inflation beginning in 2027. Form 1099-NEC is due to the IRS and the recipient by January 31. Collect a Form W-9 before the first payment so you are not chasing tax ID numbers in January. On the receiving side, payment platforms generally issue Form 1099-K only above $20,000 and 200 transactions, but all business income is taxable whether or not a form arrives.

   • $2,000 threshold for payments after December 31, 2025
   • 1099-NEC due January 31
   • 1099-K: over $20,000 and over 200 transactions
5. 05

   5. Falling behind on payroll tax deposits

   Best for: Businesses with employees

   Income tax and the employee share of Social Security and Medicare withheld from paychecks are trust fund taxes. The IRS can assess the Trust Fund Recovery Penalty, equal to the unpaid trust fund tax, personally against any responsible person who willfully fails to pay it, and paying other creditors instead counts as willful. Use a reliable payroll provider and never borrow from withholding to cover a cash crunch.

   • Penalty equals the unpaid trust fund tax
   • Owners and officers can be personally liable
   • Paying other bills first is treated as willful
   Read more →
6. 06

   6. Electing S corporation status without a reasonable salary

   Best for: Profitable LLC owners considering an S election

   An S corporation can reduce self-employment tax, but the IRS requires shareholder-employees who provide services to receive reasonable compensation as wages before taking distributions. Courts look at training and experience, duties, time spent, what comparable businesses pay and similar factors. Paying no salary, or electing before profits justify the added payroll and return costs, are both common missteps.

   • Wages first, distributions second
   • Compensation must be reasonable for the services provided
   Read more →
7. 07

   7. Assuming South Carolina depreciation matches federal

   Best for: Businesses buying equipment, vehicles or improvements

   Federal law now provides permanent 100% bonus depreciation for qualified property acquired after January 19, 2025. The South Carolina Department of Revenue lists section 168(k) bonus depreciation among the federal provisions the state does not adopt, so the SC return adds it back and uses regular depreciation instead. Keeping only one depreciation schedule leads to errors on the state return and on later sales.

   • Federal: permanent 100% bonus for property acquired after January 19, 2025
   • South Carolina: bonus added back
   • Keep separate federal and SC asset schedules
   Read more →
8. 08

   8. Not filing because you cannot pay

   Best for: Owners facing a balance due

   The IRS failure-to-file penalty is 5% of the unpaid tax for each month or part of a month the return is late, up to 25%, while the failure-to-pay penalty is 0.5% per month. Filing on time, or filing an extension and then the return, and paying what you can keeps the larger penalty off the bill.

   • Late filing: 5% per month, up to 25%
   • Late payment: 0.5% per month
   • File on time even if you cannot pay in full
9. 09

   9. Throwing records away too soon

   Best for: Every business

   The IRS generally says to keep records supporting a return for three years, employment tax records for at least four years, and records for six or seven years in specific cases such as substantially underreported income or bad debt claims. Records for property and equipment should be kept until the limitations period expires for the year you dispose of the asset.

   • 3 years is the general rule
   • 4 years for employment tax records
   • Asset records until the limitations period after sale ends
10. 10

    10. Ignoring an IRS or SCDOR letter

    Best for: Anyone who receives a notice

    Most notices have a response deadline, and missing it can turn a fixable mismatch into an assessment with fewer appeal rights. Read the notice, check it against your return and respond by the date shown. Haigler CPA Group handles tax controversy work, including notice responses and audits.

    • Every notice has a response date
    • Compare the notice to your filed return before paying
    Read more →
11. 11

    11. Waiting until December to plan

    Best for: Profitable businesses and owners with changing income

    Some of the most useful moves need lead time: setting up a SIMPLE IRA must happen by October 1 to be effective for the year, S corporation payroll needs to run during the year, and equipment has to be placed in service by year-end to be depreciated. A fall review of year-to-date profit leaves time to act.

    • SIMPLE IRA setup deadline: October 1
    • Equipment must be placed in service by year-end
    • Salary decisions for S corporation owners happen in-year
    Read more →

The information on this site is general in nature and is not tax, legal, or accounting advice for your situation. Tax law changes and the right answer depends on facts we would need to review with you. Please speak with a qualified professional before acting on anything you read here.

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