Not too long ago, I was asked to sit on a panel for new entrepreneurs. The room was full of people who had either just started a business or were in their first real year of running one. Someone raised their hand and asked,
“From your experience as an accountant and tax strategist, what’s the biggest tax mistake new business owners make?”
The room went quiet. Everyone leaned in.
What struck me wasn’t the question itself. It was the look on their faces. They weren’t looking for loopholes or tricks. They wanted reassurance. Most of them had momentum. Revenue was coming in. Expenses were real now. The business felt legitimate. And they wanted to know whether they were about to mess something up without realizing it.
My answer surprised them. Not because it was complicated, but because it wasn’t about one mistake. It was about how the first year quietly sets patterns that are hard to undo.
The most expensive tax mistakes rarely happen because someone is reckless. They happen because year one feels temporary. People assume they’ll clean things up later. The IRS doesn’t see it that way.
Why the First Year Matters More Than You Think
Your first year in business is when habits form. How you move money, the way you document expenses, and the way you handle taxes. Those habits become your baseline.
I’ve worked with business owners who had great second and third years but were still paying for decisions made in their first twelve months. Not because those decisions were illegal, but because they were unintentional.
The IRS looks for consistency. Banks do too. So do future investors and partners. When your first year lacks structure, fixing it later often means explaining why things changed. That explanation isn’t always simple.
Starting With the Wrong Entity for the Wrong Reason
One of the most common themes that came up during that panel discussion was entity choice. Almost everyone had strong opinions about LLCs and S-Corps. Very few understood the difference.
Many new owners form an LLC because it feels easy and safe. Others jump straight to an S-Corp because someone told them it saves taxes. Both paths can be correct. Both can also be wrong.
An LLC is a legal structure. By default, it offers no tax strategy on its own. An S-Corp is a tax election layered on top of that structure, and it introduces rules around payroll, reasonable salary, and distributions.
In the first year, profit levels are often unpredictable. That makes timing critical. Electing an S-Corp too early can add complexity without savings. Waiting too long can mean missed opportunities. The mistake isn’t choosing one or the other. The mistake is choosing without understanding what comes next.
Treating the Business Account Like a Personal Wallet
Another question from the panel came from someone who said, “I just move money when I need it. Is that a problem?”
In year one, that’s incredibly common. Cash flow feels informal. Money comes in, bills get paid, and whatever is left feels like income.
The problem is that the IRS doesn’t see it that way. They care about classification. Was it wages? A draw? A distribution? Was payroll required? Was it documented?
When business and personal finances blur together, deductions become harder to defend and income becomes harder to categorize. That’s not just a bookkeeping issue. It’s a credibility issue.
I’ve seen audits hinge on this exact pattern. Not because the numbers were massive, but because the story didn’t make sense.
Reasonable Salary Shows Up Earlier Than People Expect
When the panel discussion turned to S-Corps, the room got even quieter. Reasonable salary always does that.
New business owners often assume this is a future issue. Something to deal with once income stabilizes. In reality, it shows up the moment profits are driven by your labor.
Reasonable salary means paying yourself what the market would pay someone else to do your job. Not what you need to live on, it’s what feels conservative, or the operational strategy that minimizes payroll taxes.
In the first year, many owners avoid payroll entirely or set it artificially low. That choice feels harmless at the time. Years later, it’s often the centerpiece of an audit.
I’ve seen distributions reclassified as wages retroactively. That single adjustment can trigger back payroll taxes, penalties, and interest. The irony is that most of those owners were trying to be careful.
Assuming Compliance Equals Strategy
One of the final questions on the panel was about accountants. Someone asked whether having an accountant meant they were “covered.”
I answered honestly.
Most accountants are excellent at compliance. They file accurate returns. They meet deadlines. That matters. But compliance reports what already happened. Strategy shapes what happens next.
In the first year, many business owners assume that if something mattered, their accountant would bring it up. That’s not always how the relationship works. Especially when the accountant meets the client once a year, after decisions are already locked in.
I’ve reviewed first-year returns that were technically correct and strategically weak. In most cases, there was no planning around compensation, zero consideration given to retirement options, and minimal coordination between entity choice and growth.
Those missed conversations don’t show up as errors. They show up as higher taxes year after year.
Underestimating the Impact of Estimated Taxes
Estimated taxes came up more than once during the forum. Almost everyone was surprised by them.
There’s no employer withholding in a business you own. That responsibility shifts immediately. In the first year, income swings make planning feel optional. It isn’t.
I’ve watched business owners reinvest aggressively, only to get blindsided by a tax bill they didn’t set aside for. The business didn’t fail. Cash planning did.
Taxes are as much about timing as they are about totals. When you plan for them early, they stop being emergencies.
Being Too Aggressive or Too Cautious With Deductions
Some new owners deduct everything. Others deduct almost nothing. Both approaches cost money.
Fear leads people to leave deductions on the table. Overconfidence leads people to take deductions they can’t defend. The IRS rewards neither.
In year one, documentation habits form quickly. When those habits are sloppy, they follow you. When they’re clean, audits become conversations instead of confrontations.
Why Year One Echoes Forward
As the panel wrapped up, I realized something. The question they asked wasn’t really about mistakes. It was about confidence.
They wanted to know whether they were building something solid or something fragile.
The first year of business isn’t just about getting through it. It’s about setting a foundation. Entity choice, compensation, cash flow, and documentation all interact. When those pieces align, taxes become manageable. When they don’t, they compound quietly.
Most of the problems I fix years later started with reasonable assumptions made too early and never revisited.
Bringing It All Together
The biggest tax mistakes in the first year aren’t dramatic. They’re subtle. They come from acting without context and assuming you’ll clean things up later.
Taxes aren’t something you deal with once a year. They’re the result of decisions made all year long. When those decisions are intentional, the system works in your favor. When they’re accidental, it doesn’t.
If you’re in your first year or just beyond it, the best move you can make is to pause, review the foundation, and make sure it supports where you’re going next.
Welcome to the New Age of Accounting. Let’s begin.
P.S. If you found this article helpful, you’ll love my new book S-Corp Mastery: How Smart Business Owners Maximize Tax Savings & Build a Lasting Legacy. It’s now live and available in a sleek, easy-to-read PDF version. Grab your copy here
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
