8 Common Tax Mistakes Snohomish County Small Businesses Make

Most small business tax problems aren't the result of bad faith — they're the result of common mistakes that nobody warned the business owner about. Here are the 8 mistakes we see most often, and how to avoid them.

1. Mixing Business and Personal Money

Using your personal credit card for a business expense, or your business account for personal groceries, "to sort out later" — this creates a nightmare at tax time and can pierce the corporate veil for LLCs and S-Corps (meaning your personal assets are no longer protected).

Fix: Get a separate business checking account and credit card. Use them exclusively for business. Period. Even sole proprietors should do this.

2. Failing to Make Quarterly Estimated Payments

If you're self-employed or own a business, the IRS expects you to pay taxes throughout the year. Wait until April and you'll owe a big lump sum PLUS underpayment penalties.

Fix: Calculate quarterly payments based on prior year tax (safe harbor: 100% of last year's tax, or 110% if you make over $150K). Pay April 15, June 15, September 15, and January 15.

3. Misclassifying Workers as Contractors

The IRS scrutinizes "contractor" classifications. If you control HOW the worker does the job, set their hours, provide their tools, and they only work for you — they're an employee, not a contractor. Misclassification penalties are severe: back payroll taxes, interest, and fines.

Fix: Use the IRS 20-factor test. When in doubt, classify as employee. The savings from contractor classification are not worth the risk.

4. Skipping the Mileage Log

Vehicle deductions are one of the largest deductions for service-based businesses, but the IRS requires contemporaneous records — meaning you write it down at the time, not reconstruct it from memory in April.

Fix: Use a mileage tracking app (MileIQ, Stride, Hurdlr) that logs trips automatically. At minimum, keep a calendar with starting odometer, ending odometer, and trip purpose for each business drive.

5. Not Saving Receipts (Especially for Cash Purchases)

Bank and credit card statements show that money was spent, but they don't prove what was purchased or that it was for business. The IRS can disallow deductions without supporting documentation.

Fix: Photograph or scan every business receipt. Use an app (Expensify, Shoeboxed, or just your phone's photo library with a dedicated album). Keep digital records for at least 7 years.

6. Taking Excessive Owner Draws as an S-Corp

S-Corp owners must pay themselves "reasonable compensation" through W-2 payroll. Taking all the money as distributions to avoid payroll taxes is a major IRS audit trigger. The IRS can reclassify distributions as wages, hit you with back payroll taxes, penalties, and interest.

Fix: Pay yourself a defensible salary based on what you'd pay someone else to do your job. Document how you arrived at the figure.

7. Forgetting Washington State Filings

Washington has no income tax, but small businesses owe:

• B&O Tax (Business & Occupation tax) — paid to Department of Revenue based on gross receipts
• Sales Tax — collected from customers, remitted monthly or quarterly
• L&I (Workers' Comp) — required if you have employees
• ESD (Unemployment Insurance) — required if you have employees
• Annual Report to Secretary of State — your business entity will be administratively dissolved if you miss it

Fix: Set calendar reminders for all WA state filings. Use online filing portals to autopay where possible.

8. Treating Tax Time as a Once-a-Year Event

The biggest mistake is waiting until February to think about taxes. By then, most tax planning opportunities are gone:

• You can't go back and contribute to retirement accounts
• You can't go back and make purchases for Section 179 expensing
• You can't restructure as an S-Corp retroactively (unless within 75 days of year start)
• You can't gather missing documentation in time

Fix: Quarterly check-ins with your CPA. November is especially valuable — there's still time to make year-end moves before December 31.

Bonus: Failing to Keep Books

"My business is small, I don't need bookkeeping." — said every business owner who later spent twice as much hiring someone to reconstruct a year's worth of transactions.

Even basic monthly bookkeeping (categorizing transactions, reconciling bank statements) saves money at tax time and gives you visibility into how your business is actually doing throughout the year.

The Common Theme

Every mistake on this list comes from the same root cause: treating tax compliance as something to think about once a year, in March or April. The businesses that handle taxes well treat them as a continuous, low-grade activity — a little discipline every week, every month, every quarter.

That discipline pays for itself many times over. Often a single avoided mistake on this list pays for a year of CPA support.