Owning a small business can be very rewarding, but it’s also a lot of work than salary-based desk jobs. One of the greatest challenges and sources of risk for entrepreneurs is business income taxes. Regardless of whether the business is an LLC or an incorporated organization, there are many risks of calculation errors and reporting oversights. Here are some of the most common and avoidable tax mistakes that small business owners make.

Mixing Personal Accounts and Business Expenses

The most common error that entrepreneurs and small business owners make is called account comingling. That is, they use a single bank account or switch between personal and business accounts.  Mingled accounts increase the risk of missing reportable income and deductible business expenses. Having separate bank and credit accounts isn’t an IRS requirement, but its strongly advised by most taxation and accounting professionals.

Invalid Deductions and Overstating Business Expenses

Overstating business expenses is the easiest way to get the critical attention of an IRS auditor.  The two biggest red flags are when expenses continually exceed the business income and when certain expenses exceed the common percentage thresholds. Schedule C small businesses usually experience the most challenges because many deductibles are actually mixed-use assets for both personal use and business purposes. Accounting service professionals will intimately know legitimate deductions and their typical percentages.

Employee Misclassifications

The IRS states that business owners must accurately determine whether service providers are employees or independent contractors because the former will require income, Medicare and Social Security taxes to be withheld. The rules for determining whether a person should be considered an employee or a contractor are actually quite specific.  Business owners can ask themselves if they dictate how and when the individual works as well as what tasks are performed. Employees receive tools and support at no cost and receive reimbursement for expenses. Employees will have signed documented agreements that may reference insurance, vacation time and ongoing work relationships.

Misclassifying a person can result in penalties and employment taxation interest accrual. Employees receive W-2s and contractors who are paid over $600 receive Form 1099-Misc. Part two will cover IRS audits, penalties, and best practices.