7 Common Tax Mistakes First-Year Entrepreneurs Make — and How to Fix Them

Starting a business is exciting — new ideas, new customers, new freedom. But here’s the part nobody talks about: your taxes instantly become way more complicated.

And that’s where many first-year entrepreneurs get tripped up.

At uTaxes, we’ve seen the same patterns over and over again. Here are the 7 most common tax mistakes new founders make — and how you can fix them before they turn into headaches.

Let’s jump in.

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1. Mixing Personal and Business Expenses

Why it’s a problem

When you’re just getting started, it’s tempting to swipe one credit card for everything. Lunch? Ads? Laptop? Same card. But mixing personal and business spending makes bookkeeping messy, hurts your deductions, and creates stress during tax time.

How to fix it

• Open a separate business checking account and credit card
• Pay yourself properly (owner’s draw or payroll — depends on your entity)
• Categorize expenses consistently so you don’t lose deductions

Pro tip: If you’ve already mixed everything together, don’t panic. A bookkeeper can sort this out — you don’t need to start over.

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2. Ignoring Quarterly Estimated Taxes

Why it’s a problem

If you expect to owe more than $1,000 in taxes, the IRS wants you to pay as you go — not all at once in April. Many first-time founders don’t know this and get hit with a big surprise bill (plus penalties).

How to fix it

• Put the due dates on your calendar: Apr 15, Jun 15, Sep 15, Jan 15
• Estimate what you’ll owe based on your profits
• Use Form 1040-ES or get help from a tax pro to adjust your payments

Pro tip: Income swings a lot in year one — that’s normal. Use the annualized income method to match taxes to what you actually earn.

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3. Misclassifying Workers (1099 vs. W-2)

Why it’s a problem

Contractors are flexible. Employees are long-term. But the IRS cares about how much control you have, not what you call them.

Misclassify someone and you could owe back payroll taxes (ouch).

How to fix it

• Use the IRS’s three tests: behavioral, financial, relationship
• Control the schedule/methods/tools → probably a W-2 employee
• If they run their own business → likely a 1099 contractor

Pro tip: When you’re unsure, ask a CPA. Fixing this early is way cheaper than waiting.

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4. Losing Receipts and Documentation

Why it’s a problem

Yes, the IRS actually cares about receipts — even the $12 ones. Without documentation, you may lose legitimate deductions.

How to fix it

• Snap a quick photo of every business receipt
• Store them in a cloud folder or bookkeeping app
• Label them so tax season is easy

Pro tip: Digital copies are 100% acceptable. No need for a drawer full of paper.

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5. DIY-ing Complex Taxes

Why it’s a problem

Most founders think, “I’ve done my own taxes for years — how different can business taxes be?”

Answer: very different.

Running a business adds layers like:

• Multi-state sales
• Payroll
• Depreciation
• Home office deductions
• Choosing the right entity

Small mistakes can snowball into penalties or overpaying taxes.

How to fix it

• Work with someone who understands small-business taxes
• Keep your books clean during the year (not in April!)
• Do a tax strategy check-in before December

Pro tip: DIY is fine for W-2 income. But once you run a business — even a small one — having a pro saves money and stress.

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6. Choosing the Wrong Business Entity

Why it’s a problem

LLC, S-Corp, C-Corp… confusing? You’re not alone.

Your entity affects:

• How you pay taxes
• How you pay yourself
• How much you ultimately owe

Many first-year founders:

• Pick an LLC but forget about S-Corp status
• Choose a C-Corp without understanding double taxation

How to fix it

• Review your structure once your revenue grows
• Consider S-Corp when net profit passes $40K–$60K
• Get advice before switching — it’s not a light decision

Pro tip: Missed the S-Corp election deadline? You may still qualify for a late election.

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7. Forgetting About State and Local Taxes

Why it’s a problem

Federal taxes get all the attention, but states (and sometimes cities) want their share too.

Depending on where you operate, you might need to handle:

• Sales tax
• Franchise tax
• Payroll tax
• Annual reports
• Local business taxes

If you sell online, you may owe sales tax in states you’ve never visited.

How to fix it

• Check your state’s rules for small businesses
• Understand where you have sales tax nexus
• Don’t miss annual report deadlines
• Track obligations as you expand into new states

Pro tip: States love sending penalty letters. Staying ahead of deadlines saves your sanity.

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Final Thoughts: You Don’t Have to Figure This Out Alone

Your first year in business is full of challenges — taxes don’t have to be one of them.

With clean bookkeeping, simple processes, and the right support, you can:

• Avoid penalties
• Reduce your tax bill
• Keep your business running smoothly

At uTaxes, we help founders take the stress out of taxes — clean books, simple guidance, and a team that has your back from day one.