6 Common Tax Problems Small Business Owners Should Be Aware Of

Tax issues rarely announce themselves in advance. They accumulate quietly — a missed quarterly payment here, a misclassified expense there, a payroll obligation that slips through — until a notice arrives and the problem is no longer small. For small business owners in New Jersey, understanding the most common tax problems before they occur is one of the most valuable things a CPA can provide.

Here are six tax problems that show up regularly among small business owners, and what to do about each one.

1. Missing Quarterly Estimated Tax Payments

Unlike W-2 employees, small business owners do not have taxes withheld from their income automatically. The IRS and the NJ Division of Taxation both require quarterly estimated tax payments when you expect to owe more than the threshold for the year. Missing one — or underpaying based on prior-year income that no longer reflects your current earnings — results in underpayment penalties on top of your regular tax bill.

This is one of the most common tax issues for new business owners who are not yet familiar with the estimated payment system. The fix is straightforward: work with a CPA to calculate safe harbor payment amounts each quarter so you are never caught short.

2. Payroll Tax Problems

Payroll taxes — the employer’s share of Social Security and Medicare, along with federal and state withholding — must be deposited on a regular schedule, not just at year-end. Falling behind on payroll tax deposits is one of the most serious problems with taxation a small business can face. The IRS can assess a Trust Fund Recovery Penalty against business owners personally for unpaid payroll taxes, bypassing the protection of the corporate structure entirely.

If your business has employees and you are behind on payroll tax deposits, address it immediately — this is not a problem that gets better with time.

3. Commingling Personal and Business Finances

Using a personal bank account for business transactions — or paying personal expenses from a business account — creates serious accounting and tax problems. It makes bookkeeping unreliable, creates questions about the legitimacy of deductions, and weakens the liability protection that an LLC or corporation is supposed to provide.

Every business should have a dedicated business bank account and credit card. This single step eliminates more tax issues than almost anything else a business owner can do.

4. Misclassifying Workers

Classifying employees as independent contractors is one of the most scrutinized areas of small business taxation. The IRS and the NJ Department of Labor have specific tests for determining whether a worker is an employee or a contractor — and getting it wrong results in back payroll taxes, penalties, and interest.

If you pay people regularly to perform services for your business, confirm their classification with a CPA before issues arise. New Jersey has some of the strictest worker classification standards in the country, and the penalties for misclassification are significant.

5. Failing to File on Time

Late filing penalties compound quickly, especially for business entities. S-Corp and partnership returns are due March 15 — before individual returns — and missing this deadline creates a cascade of problems for shareholders and partners who cannot file their own returns without their K-1s. Failure-to-file penalties start at a percentage of unpaid tax per month and increase the longer the return remains unfiled.

An extension to file is not an extension to pay. If you expect to owe taxes, payment is still due by the original deadline to avoid late payment penalties and interest.

6. Not Maintaining Adequate Records

In the event of an IRS audit or NJ tax examination, the burden of proof is on the taxpayer. Deductions that cannot be supported with documentation — receipts, mileage logs, bank records, business purpose notes — are disallowed, and the resulting additional tax, penalties, and interest can be substantial.

Good recordkeeping is not just about compliance — it is your defense. Maintain organized records throughout the year, not just during tax season.

Tsamutalis & Company helps Bergen County small business owners identify and resolve tax issues before they escalate. Our IRS audit representation and tax resolution services are available for clients facing existing problems, and our year-round advisory relationships help prevent new ones from forming.

Dealing with tax problems or want to prevent them? Contact Tsamutalis & Company — Bergen County CPAs since 1992.

Disclaimer: This content is for informational purposes only and does not constitute tax or financial advice. Consult a qualified tax professional for guidance specific to your situation.