8 Common Tax Return Errors for Self-Employed Small Business Owners & Gig Workers (& How to Avoid Them)

Running your own business—or even just working for yourself—can be empowering. You get to set your own schedule, call the shots, and build something that’s yours. But let’s be honest: it can also be overwhelming.

Many self-employed folks—whether you’re a business owner, freelancer, gig worker, or anyone who’s paid as a “1099 employee”—end up juggling a lot. Even if you’re not handling every task yourself, you still need to understand enough to make sure things are running smoothly.

And when it comes to taxes? For those new to self-employment, the learning curve can feel steep. But don’t worry—you’re not alone, and getting informed is one of the best ways to set yourself up for success.

If you don’t receive a W-2 for your work and instead get paid as a contractor or gig worker, then you’re considered self-employed—and this guide is for you.

Here are 8 common problem areas: 

1)  Not filing a tax return. 

When you have a W-2 job your filing threshold, when you are required to file a tax return based on income, is higher than when you are self-employed. For example, a single person for tax year 2024 has to file a tax return if their taxable gross income is $13,850 or more. Note that you may want to file a federal return when it isn’t required to get a refund if that is possible for your tax situation. Additionally, many states have a filing requirement that is different from the federal one. 

However, business owners and gig workers have a lower filing requirement. This is to ensure that you pay Social Security and Medicare taxes and to enable you to use those programs fully in the future. If your net self-employed earnings are $400 or more, you need to file a federal income tax return. 

As part of your tax return, self-employed individuals file a Schedule C and a Schedule SE. 

• Schedule C determines your income subject to the income tax calculation
• Schedule SE determines the self-employment taxes. Self-employment taxes include social security and Medicare taxes.

Please note that IRS Freefile options may not be available if you are filing a tax return with a Schedule C and SE. You’ll need to check the different IRS Freefile partners each year to see if they cover those schedules for free. The new IRS Direct File, which will be available in some states again in the 2025 tax filing season, might not cover those schedules either. 

2) Not having enough focus  

Taxes aren’t just something to knock out and check off of your list. If you’re going to do them yourself, make sure you are doing them right. This means more than answering questions in tax software. 

IRS.gov is loaded with resources to get your taxes right. Make sure you reference instructions and publications that apply to your tax situation. IRS.gov has a small business tax center which is helpful in directing taxpayers to specific tax topics.

If you have or will have a tax professional, make sure you communicate frequently, so you understand what you need to do to get the taxes right. Getting it right isn’t all on the tax professional. The information you provide is important. If you want regular advice and planning, you may need a tax professional who is available all year. 

3) Underpaying estimated taxes

As an employee, your income taxes, social security taxes, and medicare taxes are withheld for you. When you have a small business or when you’re a gig worker, you have to make this happen yourself. This means calculating your estimated taxes. The US federal tax system is a pay-as-you-go system, so if you don’t pay enough each quarter, you could find yourself with tax penalties and interest when you file your tax return.

If you are used to getting a refund as a W-2 employee and you don’t pay estimated taxes when you switch to self-employment, you could be surprised and end up owing taxes when you file your tax return. 

If you don’t pay enough estimated taxes each quarter, you might still owe when you file your tax return. 

If you owe when you file your tax return, you may have additional penalties and interest to pay. Even if you pay enough for the whole year, but don’t pay enough for one of the quarters, you may end up paying a penalty. 

It’s important to be on top of your estimated taxes and quarterly tax payments. You can pay the estimated taxes by check or electronically. You can find more information on estimated taxes and payments here. Don’t forget that if your state has an income tax, you may have to pay state-estimated taxes, too. 

Methods to determine and/or cover your estimated taxes include using the IRS withholding calculator, using the IRS estimated tax worksheets, or using tax software. 

If you find it more difficult than you would like to handle yourself, a tax professional can help. Bookkeeping software may also help with estimating taxes. 

4) Not depositing payroll taxes

If you have employees, you must file and pay employee payroll taxes (income taxes, social security taxes, and Medicare taxes). 

It can be tempting when money is tight to delay this. Don’t. 

The penalties for not depositing required payroll taxes and for filing them late are high. And once you get behind, it’s often difficult to catch up. If you have employees, the IRS Employer’s Tax Guide is a good reference to help you understand your responsibilities. 

5) Filing late 

Avoid filing late and particularly avoid paying the taxes you owe late. 

You should have a profit goal, and paying penalties and interest will reduce your profit. 

If you can’t make the filing deadline, request an extension. However, realize that an extension can avoid the failure-to-file penalty, but not the failure-to-pay penalty. You are still expected to have paid the taxes within the normal guidelines. 

Even if you can’t pay the taxes owed, you should either file the return on time or do the extension, since the failure-to-file-penalty is higher than the failure-to-pay penalty. 

The IRS offers payment programs, and it’s usually relatively easy to get one approved because the IRS wants to collect and doesn’t want to make it harder on itself than it has to be. 

6) Not separating personal and business expenses

This is a common problem area for small businesses and gig work filed on individual tax returns. If you can’t get business credit cards and bank accounts, it’s usually acceptable (and legal) to have separate personal accounts that you use just for business or gig activity. 

If you have ever had a mystery payment on your credit card that you tried to figure out what it was a couple of months later, then you have an idea of why this is important. 

Keeping the expenses separate helps ensure you claim all of your valid expenses and that your tax returns are correct. There’s also an added benefit that if you are audited, you’ll be better positioned to pass an audit. 

7) Errors in vehicle-related deductions 

This topic can have much more detail than you might expect. I’ll just touch on it here. Usually, you can deduct expenses using either the standard mileage method or actual expenses. Not both. 

There is an exception for tolls and parking. You can use the standard mileage method and still deduct toll and parking expenses. 

There are criteria that can prevent you from using the standard mileage method. You can find those criteria here, as well as more detailed information on deducting vehicle expenses. 

Make sure mileage is tracked accurately whether or not you use the standard mileage method. You can do this with a manual log, and the IRS has an example log in Pub 463.

There are many apps available to help track mileage. 

Really the toughest part in getting taxes right and avoiding errors is knowing what you don’t know. The tax software companies do their best to help you with the questions they ask, tools for tax assistance, and often tax experts. However, the more you know, the lower the likelihood of mistakes. 

The IRS small business tax center was already mentioned above, and another great resource is the IRS gig economy tax center. 

8) 1099-K Errors

Payment card processing and third-party payment networks are required to file a 1099-K with the IRS and provide the taxpayer who received payments for goods and services. 

Payment card processing has no minimum reporting requirement. They have to be reported no matter the amount. 

While implementation of the current requirements was delayed, and there has been talk of further delays, in 2025, third-party payment networks (or third-party settlement organizations) have to file a 1099-K when total payments to one taxpayer add up to more than $2,500 for the tax year.

One common error is not claiming income if you don’t receive a 1099-K. But if you receive taxable income, it should still be reported on your tax return. Receiving a 1099-K doesn’t determine whether or not the income is taxable. 

Another common error is not taking appropriate deductions related to the income reported on a 1099-K. Generally speaking, you report the total payments received and subtract any processing fees and other costs as deductions. If you are reselling items that you bought as a business activity, then part of the deductions is the cost you paid for the items.

The proper handling of 1099-K forms can be confusing. Fortunately, the IRS has provided FAQs which are helpful, and these are found in FS-2024-03.