Updated: March 2, 2026

Tax season is typically a time of the year many individuals and businesses dread as it requires tedious review of documentation and ensuring accuracy to avoid penalties and fees. Companies of any size can have tax compliance headaches. We’re unpacking tax errors and how employers can get ahead of them for tax season:

What are the most common tax errors employers face?

Misclassifying Workers

One of the most common tax errors business owners make is misclassifying their workers. Understanding the difference between 1099 employees and W-2 employees is imperative for business owners to ensure each worker’s classification is accurate.

But what are the actual costs of misclassifying a worker? Provided that the error was not intentional (IRS Code §3509), the costs are:

• 1.5% of wages for failure to withhold federal income tax
• 40% of the employee’s FICA taxes that should have been withheld
• 100% of the employer’s FICA share
• Interest on unpaid taxes from the original due date

However, if the Department of Labor believes the employee misclassification was intentional, additional fees include penalties for missing or incorrect Forms W‑2, which generally range from $60 to $340 per form, or $680 per form for intentional disregard.

Misclassification repercussions do not end at paying fines or facing criminal penalties but may also entail repaying benefits owed to each misclassified employee, such as retirement savings contributions, healthcare coverage, stock choices, overtime, paid time off, and break periods.

Insufficient Payroll Records

The IRS recommends business owners to maintain payroll records for at least 3 years, which may include:

• Time sheets
• Other records that show wage computations (i.e. piece work tickets)
• Copies of W-2 forms
• Job evaluations

Business owners can subject themselves to audits and fines if they have insufficient payroll records.

For this reason, some business experts recommend keeping payroll and employment records up to seven years for auditing purposes. Depending on your business’s record, the purpose of maintaining appropriate payroll and employment records may vary and thus, will determine your time frame for recordkeeping.

Compensating Creditors First

When cash flow slows, business owners oftentimes pay off creditors before the IRS. However, payroll factoring can be a more effective solution. Payroll factoring is when an invoice factoring business, like LSQ, buys a business’s outstanding invoices and advances up to 95% of the total funds for a lower rate. This offers immediate relief without incurring additional debt.

Form 941 (Employer’s Quarterly Federal Tax Return) Errors

Businesses who file taxes quarterly file a Form 941. However, many businesses make error when filing a Form 941. Here are some of the common Form 941 tax errors and how to avoid them.

• Using the wrong form: The IRS makes it clear that businesses are to use the March 2026 revision of Form 491 for taxes. Using an earlier revision to report taxes can leave you out of compliance with major changes from One Big Beautiful Bill (OBBA).
• Incorrectly referencing forms: Unless otherwise noted, references throughout these instructions to Form W-2 include Forms W-2AS, W-2CM, W-2GU, W-2VI, and 499R-2/W-2PR; references to Form W-2c include Form 499R-2c/W-2cPR; references to Form W-3 include Form W-3SS and Form W-3 (PR); and references to Form W-3c include Form W-3C (PR).
• Trying to include COVID-19 related credit: While it’s not likely you’ll run into this, the IRS expressly calls out that COVID-19 credit for qualified sick and family leave wages from March 31, 2020 to October 1, 2021 can no longer be claimed on Form 941.

What can employers do to reduce tax errors?

If you are preparing to file your taxes or want a simple checklist to better understand taxes and avoid making common tax errors, here are a few tips.

Determine Your Business Type

There are different business types that require different tax forms. Here is a glossary of business types.

• Sole Proprietorship: An unincorporated business owned by a sole individual.
• Partnership: Two or more individuals who run a trade or business together.
• International Business: A business with activities in the United States or a U.S.-based business with activities in another country.
• Corporation: An entity independent from its owner.
• S Corporation: A corporation that pass corporate income, losses, deductions, and credits through shareholders for federal tax purposes.
• Limited Liability Company (LLC): A corporation where members of the company cannot be held liable for business debts or liabilities.

Understand What Each Deadline Entails

If you file taxes annually, and you’re a partnership or S corporation, the last day to file is March 15. If you’re a C corporation, you’ll file by April 15, 2026. Deadline for extended partnership and S corporation returns is September 15, 2026. The deadline for extended C corporation returns is October 15, 2026.

Collect All the Documentation and Forms

The type of business will determine which forms you need to file for taxes. For example, if you have a C corporation or an S corporation, you may need to file:

• Form 1120: U.S. Corporation Income Tax Return
• Form 1120-W: Estimated Tax for Corporations
• Form 940: Employer’s Annual Federal Unemployment (FUTA) Tax Return
• Form 941: Employer’s Quarterly Federal Tax Return
• Form 943: Employer’s Annual Federal Tax Return for Agricultural Employees*
• Excise Taxes*

*NOTE: These are only applicable if you conduct business in specific industries (i.e., Form 943 if you have farm employees, excise taxes on specific goods or activities).

Tax errors can take out even the most diligent business owner or payroll team. Our team of payroll services technicians and human resources specialists can help walk you through the essentials. Worried about compliance errors? Our VensureHR compliance team ensures you stay up to date on the latest legal updates and remain compliant. Tax help is on the horizon. Connect with our team today.