Common Tax Mistakes by LLC Owners in 2025 & How to Avoid Them

Key Takeaways

• Proper recordkeeping is essential to avoid audits and maximize deductions.
• Misclassifying workers can result in significant IRS penalties and back taxes.
• Separating personal and business finances protects your LLC’s liability shield.
• LLC owners must stay current with both federal and state tax obligations.
• Consult a professional to prevent costly filing errors and missed opportunities.

It’s no secret that limited liability companies (LLCs) are popular due to their flexibility and strong protection of personal assets, among other selling points. However, despite their advantages, many LLC owners often make tax mistakes that can result in various financial setbacks.

Here are the ones you should avoid and how to sidestep them with smart, proactive planning:

Mistake #1: Neglecting Proper Record-Keeping

Many LLC owners fail to maintain organized, accurate records of income and expenses throughout the year. This neglect can result in:

• Missed deductions
• Inaccurate reporting
• Increased audit risk

How to Avoid This:

• Utilize cloud-based accounting software, such as QuickBooks or Xero.
• Regularly reconcile bank statements and categorize transactions.
• Keep digital copies of all receipts, invoices, and mileage logs.
• Hire a professional bookkeeper or CPA if necessary.

Key Takeaway: Well-maintained books aren’t just for taxes. They help you understand your cash flow and make better business decisions.

Mistake #2: Misclassifying Workers

The IRS has strict criteria for classifying workers as independent contractors vs. employees. Misclassification can lead to penalties for unpaid payroll taxes, interest, and back wages.

How the IRS Differentiates:

• Behavioral Control: Who directs how and when work is done?
• Financial Control: Who covers expenses, tools, and risks?
• Relationship Type: Is there a contract or benefits involved?

What To Do Instead:

• Review IRS guidance on worker classification.
• When in doubt, consult a tax or employment law expert.

Expert Tip: Regularly review your contractor agreements. Misclassifying even one worker can trigger an audit and hefty fines.

Mistake #3: Failing to Separate Personal and Business Finances

Mixing personal and business funds can jeopardize the liability protection offered by an LLC and complicate tax reporting.

Best Practices:

• Open a dedicated business bank account and credit card.
• Never pay personal bills from your business account—or vice versa.
• Log every transaction clearly and document reimbursements.

Expert Note: Co-mingling finances is one of the top red flags that can “pierce the corporate veil” and put your personal assets at risk.

Mistake #4: Ignoring State Tax Obligations

While most business owners are aware of federal tax requirements, many overlook state-specific taxes such as:

• Franchise taxes
• Sales and use taxes
• Employment or excise taxes

What To Do Instead:

• Visit your state’s Department of Revenue site (e.g., tax.ny.gov, ftb.ca.gov)
• File state annual/biennial reports on time
• Register for any necessary tax permits (sales tax, excise, etc.)

Pro Tip: Hire a tax professional who understands both federal and state laws, especially if you operate in multiple states.

Mistake #5: Neglecting Quarterly Estimated Tax Payments

LLC owners often forget that income taxes aren’t automatically withheld. If your LLC is taxed as a sole proprietorship or partnership, you might need to make quarterly estimated tax payments.

What To Do Instead:

• Use IRS Form 1040-ES to calculate your payments.
• Set aside 25–30% of net income each quarter.
• Mark these due dates for 2025:
  • April 15
  • June 17
  • September 16
  • January 15 (2026)

NCH Advice: Even if your business isn’t yet profitable, income from side gigs or freelancing still requires quarterly payments.

Mistake #6: Disregarding Retirement Contributions

Saving for retirement may not be top of mind, but tax-advantaged retirement accounts offer significant benefits in 2025, including tax deductions and long-term savings.

Benefits of Retirement Contributions:

• Reduces taxable income
• Builds long-term financial security
• May qualify you for tax credits (like the Saver’s Credit)

Best Options for LLC Owners:

• SEP IRA – Simple and great for solopreneurs
• Solo 401(k) – Higher contribution limits if you have no employees
• Simple IRA – For businesses with up to 100 employees

Expert Tip: Contributions reduce your taxable income while securing your financial future.

Mistake #7: Overlooking Depreciation and Amortization

LLC owners often overlook the need to depreciate business equipment, property, or intangible assets, leaving valuable deductions unclaimed.

What To Do Instead:

• Identify assets with a useful life of more than one year.
• Use IRS Publication 946 to learn about MACRS depreciation.
• Talk to a tax advisor about Section 179 and bonus depreciation rules for 2025.

Important Note: Even small equipment purchases, such as laptops or software subscriptions, may qualify for depreciation deductions.

Mistake #8: Procrastinating Tax Planning

Tax planning isn’t something to do only in April. Reactive decisions lead to missed opportunities.

Proactive Planning Can Help You:

• Maximize deductions
• Avoid surprises at year-end
• Take advantage of the current 2025 tax incentives or credits

Best Practices:

• Schedule quarterly check-ins with your tax advisor
• Stay updated on IRS policy changes
• Consider restructuring your LLC (e.g., S Corp election) if it reduces the tax burden

Expert Tip: Smart tax planning happens year-round, not just in Q1.

Mistake #9: DIY Tax Preparation Without Professional Guidance

Even with software tools, taxes can be complex. Filing without professional help leads to common errors:

• Missed deductions
• Misfiled forms
• Higher audit risks

Why Hire a Professional:

• Ensures compliance
• Reduces the chance of IRS audits
• Saves time and often money

NCH Insight: The right advisor can often save more in taxes; the cost of hiring one is usually offset by increased deductions and peace of mind.

Mistake #10: Not Understanding the Default Tax Classification

You may assume that forming an LLC automatically determines how their business is taxed. In reality, the IRS assigns default tax classifications based on the number of members:

• Single-member LLCs are taxed as sole proprietorships.
• Multi-member LLCs are taxed as partnerships.

If a different tax treatment (e.g., S Corporation or C Corporation) is more beneficial, you must proactively elect that with the IRS by filing Form 8832 or 2553.

What To Do Instead:

• Understand your default tax status upon formation.
• Consult a tax advisor to know if the S-Corp election reduces your self-employment taxes.
• Revisit your election annually to assess whether your classification is still optimal.

Expert Tip: Don’t assume you’re locked into your current tax setup. Tax status elections can significantly affect your annual tax bill and payroll structure.

Mistake #11: Overreporting or Underreporting Income

Whether it’s due to human error or poor systems, misreporting income—either by underreporting or accidentally overreporting—can raise red flags with the IRS and state tax agencies. Even honest mistakes can result in audits and penalties.

What To Do Instead:

• Use accounting software that automatically tracks and categorizes your income.
• Cross-reference 1099s and bank deposits with your bookkeeping records.
• Double-check entries, especially around tax time, and reconcile discrepancies early.

Expert Note: If the IRS receives 1099s that don’t match your reported income, it can automatically trigger a notice or audit.

Mistake #12: Forgetting to File or Send 1099s to Contractors

If your LLC pays $600 or more to any independent contractor, you’re required to send them a Form 1099-NEC and submit a copy by the annual deadline (January 31st). Failure to issue one can result in penalties of $60 per form, with additional increases depending on the lateness of the filing.

What To Do Instead:

• Track contractor payments throughout the year.
• Collect W-9 forms from all contractors before issuing payment.
• Utilize e-filing platforms to submit forms on time and maintain organization.

Expert Tip: Set a recurring reminder for January 15th every year to prepare your 1099s in advance and avoid last-minute filing issues.

Mistake #13: Deducting Non-Qualified Expenses

Some LLC owners incorrectly deduct personal or non-qualified expenses, believing they’re reducing their tax liability. This can lead to disallowed deductions and audits.

What To Do Instead:

• Familiarize yourself with legitimate business deductions.
• Avoid deducting:
  • Personal clothing
  • Family vacations
  • Commuting costs (unless you qualify for home office deductions)

Expert Note: Always keep receipts and write short notes on them about the business purpose. This helps if you’re ever audited.

Mistake #14: Overlooking Local Business Taxes and Licenses

Beyond federal and state taxes, many LLCs are subject to local business taxes, licensing fees, and permits, especially in cities or counties with strict regulations.

These fees may include:

• Gross receipts taxes
• Local payroll taxes
• Business operation permits

What To Do Instead:

• Check with your city or county’s business licensing department.
• Budget for local tax obligations and renew licenses annually.
• Work with a local CPA who understands the specific requirements of municipalities.

Mistake #15: Ignoring Audit Red Flags

Certain actions increase your chances of being audited. These include:

• Reporting large deductions relative to income
• Failing to issue 1099s
• Using round numbers excessively
• Reporting consistent losses year after year

While audits aren’t always avoidable, minimizing red flags can help keep your LLC off the radar.

What To Do Instead:

• File accurate, detailed tax returns with supporting documentation.
• Avoid guessing. Use exact numbers, not estimates.
• Keep profit-and-loss statements that support your deductions.

Expert Tip: If you’re ever selected for an audit, a clean, well-documented bookkeeping system can make the process painless—and even result in no changes.

Compliance Is Key

Being tax compliant as an LLC owner in 2025 is more important than ever. From avoiding IRS penalties to optimizing deductions and retirement contributions, each decision plays a role in your business’s success. By staying organized, separating finances, and seeking expert advice, you’ll avoid the most common tax mistakes and strengthen your financial position.

Expert Tips From NCH

• Use accounting software to automate transactions and reduce human error.
• Set quarterly calendar reminders to stay on top of estimated tax payment deadlines.
• Maintain both digital and physical backups of important tax documents for a minimum of seven years.
• Review your business structure annually to ensure it’s the most tax-efficient choice.
• Consult a professional to maximize depreciation and tax deductions.

Get Support Now

At NCH, we understand the intricate demands of managing a successful LLC, and we are committed to supporting entrepreneurs with expert guidance on tax matters. Whether you require personalized tax planning, compliance assistance, or ongoing support, our team is dedicated to helping you achieve your financial goals. 

Call us today at 1-800-508-1729 or visit our website for a FREE consultation!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.