7 Tax Mistakes U.S. Business Owners Make (And How to Avoid Them)

The most expensive small business tax mistakes are running business and personal money through one account, missing quarterly estimated tax payments, misclassifying employees as contractors, filing information returns late, and ignoring state sales tax and franchise tax filings. The Form 1099-NEC reporting threshold rose from $600 to $2,000 for payments made after December 31, 2025, but the 31 January filing deadline did not change.

Key takeaways

• The 1099-NEC reporting threshold is $2,000 for 2026 payments, up from $600.
• Estimated tax payments are due 15 April, 15 June, 15 September, and 15 January.
• Companies formed in the United States no longer file beneficial ownership reports with FinCEN.
• Delaware corporations owe franchise tax by 1 March, and California LLCs owe $800 every year.
• An S corporation election does not delete employment tax, it shifts it onto a reasonable salary.

Three of these rules changed recently. The information return threshold more than tripled, the federal beneficial ownership requirement stopped applying to U.S. companies, and the IRS raised the business mileage rate mid-2026. The guide is written for founders running a U.S. entity, including international founders.

What are the seven most costly small business tax mistakes?

The seven mistakes below are ordered by when they usually start costing money, from the first week of trading to the first filing season. The table names each mistake, the cost mechanism, and the fix.

Use this as a compliance calendar, not a reading exercise. Most are prevented by a decision made once, not by anything you do at filing time.

Mistake 1: Mixing business and personal funds

Running business income and personal spending through one account is the most common and most fixable error a new company makes. The Small Business Administration warns that without separation "you risk forfeiting the legal protections that entity structures offer," because separation "will prevent the co-mingling of funds, accounts, and assets which protects the integrity of the corporate veil" (SBA on separating business finances).

The tax cost arrives first. IRS Publication 583 tells new businesses that "one of the first things you should do when you start a business is open a business checking account," because the checkbook is the main source of entries in the books (IRS Publication 583). A mixed account produces a ledger nobody can substantiate, so earned deductions go unclaimed.

Across the 500+ companies Blugency has served since 2021, the most common cleanup job in year one is reconstructing twelve months of expenses from a personal card statement. Commingling is also one of several facts a court may weigh when deciding whether to disregard an entity, and that standard varies by state. Meet the team behind Blugency.

Mistake 2: Skipping quarterly estimated tax payments

The United States runs a pay-as-you-go tax system, and the IRS requires estimated payments from "sole proprietors, partners, and S corporation shareholders" who expect to owe $1,000 or more when the return is filed, or $500 for corporations (IRS, Estimated Taxes). For calendar year filers the payments are due 15 April, 15 June, 15 September, and 15 January, and a due date falling on a weekend or legal holiday moves to the next business day (IRS Publication 509). Fiscal year filers pay on the 15th day of the 4th, 6th, and 9th months of the tax year and the 15th day of the first month after it ends.

Self-employment tax surprises first-time founders. The rate is 15.3%, being 12.4% Social Security plus 2.9% Medicare, and it applies once net earnings reach $400, up to an annual wage base the IRS adjusts yearly (IRS Publication 334).

How the estimated tax safe harbor works

The underpayment penalty is avoidable through a safe harbor. The IRS states you avoid it if "you paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less." Where prior-year adjusted gross income exceeded $150,000, or $75,000 for married filing separately, substitute 110% for 100% (IRS, Underpayment of Estimated Tax Penalty).

Founders who expect an unpredictable year often work from the prior-year figure for that reason, since the amount is already known in January. The penalty is also not a flat fine. The IRS calculates it from the underpayment, the period it went unpaid, and published quarterly interest rates.

Mistake 3: Misclassifying employees as independent contractors

Calling a worker a contractor does not make them one, because the IRS decides classification on substance. The agency applies three common law categories: behavioral control, meaning whether the company controls "what the worker does and how the worker does the job"; financial control over "the financial and business aspects of the worker's job"; and the relationship of the parties, including "written contracts or employee type benefits" (IRS, Worker Classification 101).

A signed contractor agreement is evidence, not a verdict. The IRS is explicit that "if a business misclassified an employee, the business can be held liable for employment taxes for that worker." The sharper edge is the Trust Fund Recovery Penalty, which reaches individuals. A responsible person who willfully fails to pay over withheld taxes is personally assessed an amount "equal to the unpaid balance of the trust fund tax," and the IRS states that "no evil intent or bad motive is required" (IRS, Trust Fund Recovery Penalty).

Two fixes exist. File Form SS-8 for an official IRS determination when a role is ambiguous, or use the Voluntary Classification Settlement Program to reclassify workers prospectively with partial relief. Separately, the federal wage and hour test is unsettled: the Department of Labor proposed rescinding its 2024 contractor rule in February 2026 and is not enforcing it, so check the DOL rulemaking page.

Mistake 4: Missing the 1099-NEC and W-2 filing deadlines

The reporting threshold moved and almost nobody noticed. For payments made after December 31, 2025, you file Form 1099-NEC for each person you paid at least $2,000 for services, up from the long-standing $600, and the amount "may be adjusted for inflation beginning in calendar year 2027" (IRS, Instructions for Forms 1099-MISC and 1099-NEC). Plenty of published guidance still prints $600, so check the current instructions rather than an article.

The deadline did not move. Section 6071(c) requires Form 1099-NEC to be filed on or before 31 January, and Forms W-2 must reach employees and the Social Security Administration by the same date (IRS, Employment Tax Due Dates). Payments to corporations are generally exempt, with one carve-out that catches founders yearly: attorneys' fees are reportable even when the law firm is a corporation.

Penalties then apply twice, which is the part founders rarely see coming. Section 6721 penalizes failure to file with the IRS, and section 6722 separately penalizes failure to furnish the payee statement, at parallel amounts. For tax year 2026 the per-return tiers are $60 up to 30 days late, $130 through 1 August, $340 after that, and $680 for intentional disregard with no annual maximum (IRS, Information Return Penalties). Those amounts are inflation-adjusted, so check the current table.

The fix costs nothing: collect a Form W-9 before the first payment, not in January. Every year our team watches a founder chase tax IDs for contractors who stopped answering email.

Mistake 5: Ignoring sales tax nexus and state franchise tax

State obligations accrue silently and no one sends a warning. In *South Dakota v. Wayfair, Inc.*, decided June 21, 2018, the Supreme Court ended the physical presence rule and let states require collection from remote sellers (Supreme Court opinion, No. 17-494). The statute at issue covered sellers delivering more than $100,000 of goods or services into the state, or completing 200 or more transactions.

Do not treat those figures as a national rule. Each state sets its own threshold, measurement base, and start date, and the transaction-count test is being dropped state by state. Texas uses a safe harbor of "total Texas revenue of less than $500,000 in the preceding twelve calendar months" (Texas Comptroller, Remote Sellers). Check the state revenue department or the Streamlined Sales Tax guidance.

Franchise tax and annual reports are owed regardless of revenue

Zero revenue does not mean zero state tax. Delaware corporations file an annual report and pay franchise tax by 1 March, with a $50 report fee and a minimum tax of $175 under the Authorized Shares Method or $400 under the Assumed Par Value Capital Method (Delaware Division of Corporations). Delaware LLCs and LPs instead pay a flat annual tax by 1 June, currently $400 (Delaware alternative entity tax instructions). Delaware has moved these amounts in recent years, so read them off the Division of Corporations site rather than a blog.

California is blunter. "Every LLC that is doing business or organized in California must pay an annual tax of $800," and "this yearly tax will be due, even if you are not conducting business, until you cancel your LLC" (California Franchise Tax Board). The first-year exemption some blogs still cite expired for tax years beginning on or after January 1, 2024.

The most common surprise notice our team sees is a Delaware franchise tax bill for a company that stopped operating a year earlier. Keeping state filings and tax dates together is why Blugency runs formation, taxes, and compliance on one platform.

Mistake 6: Letting bookkeeping slide until filing season

Reconstructing a year of records in April costs more than the bookkeeping would have. IRS Publication 583 states that "you can choose any recordkeeping system suited to your business that clearly shows your income and expenses," so the standard is substantiation, not software (IRS Publication 583). Three deductions with current figures:

• Vehicle expenses: For 2026 the IRS set the business mileage rate at 72.5 cents per mile for 1 January through 30 June, then raised it to 76 cents for 1 July through 31 December (IRS, Standard Mileage Rates). On a car you own, you must choose the standard rate in the first year the car is available for business (IRS Topic 510).
• Home office: The simplified option is a set rate per square foot, capped at 300 square feet, for space "exclusively used on a regular basis for business purposes". The rate has been $5 per square foot, a maximum of $1,500, since the option was introduced, and the IRS publishes the current figure (IRS, Simplified Home Office Option).
• Start-up costs: You may elect to deduct up to $5,000 of start-up costs and $5,000 of organizational costs, each reduced by the amount those costs exceed $50,000, with the remainder amortized (IRS Publication 583). Pre-formation spending is not fully deductible on day one.

Business meals generally remain limited to 50%, and you or an employee must be present when the food is furnished (IRS Publication 334). Restaurant meals were 100% deductible only in 2021 and 2022. Separately, for amounts paid or incurred after 2025, an employer can no longer deduct food and beverages provided through an eating facility that qualifies as a de minimis fringe or is furnished for the convenience of the employer, a scheduled change from the 2017 tax law (IRS Publication 15-B).

Mistake 7: Misreading what an S corp election actually saves

An S corporation election does not remove 15.3% self-employment tax from your profit. The election removes employment tax only from profit distributed above a defensible salary, because the Form 1120-S instructions require that "distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered" (IRS, S Corporation Compensation).

The table compares three tax treatments of the same operating business on employment tax, payroll, and federal filing.

The election tends to be worth discussing once profit consistently exceeds a defensible market salary by enough to cover payroll administration, a separate return, and any state level S corporation tax. The IRS lists the factors courts weigh, including training and experience, duties, time devoted to the business, and what comparable businesses pay. A token salary invites reclassification, as in *David E. Watson, P.C. v. United States*, 668 F.3d 1008 (8th Cir. 2012), where a shareholder's low salary was recharacterized as wages.

Timing matters as much as the salary. Form 2553 must be filed no more than 2 months and 15 days after the beginning of the tax year the election takes effect, or during the preceding tax year (IRS, Instructions for Form 2553). The late filing penalty for pass-through entities is charged per owner, per month, for up to 12 months, at a rate the IRS adjusts annually (IRS, Failure to File Penalty). A two-shareholder S corporation six months late owes twelve months of that rate.

Do you still have to file a BOI report for your LLC?

Companies formed in the United States no longer file beneficial ownership information reports with FinCEN. Under the interim final rule published March 26, 2025, "reporting company" covers only entities "formed under the law of a foreign country and that have registered to do business in any U.S. State or Tribal jurisdiction." Entities created in the United States and their beneficial owners are exempt, and foreign reporting companies do not report the information of any U.S. persons (FinCEN, Beneficial Ownership Information).

This is one requirement that currently does not apply to U.S. formed companies. The rule is still interim and litigation over the underlying statute continues, so check FinCEN's BOI page before acting on it.

Where to go from here

Most of these mistakes come down to a date nobody put on a calendar. Put 31 January, 1 March, 15 April, 1 June, 15 June, 15 September, and 15 January on one calendar, collect a Form W-9 before you pay anyone, and open the business account before the first dollar of revenue. For a second opinion, schedule a meeting with our team or contact us.

Blugency is not a law firm and this article is general information, not legal or tax advice for your specific situation, so confirm current requirements with the IRS or your state before you act.