12 Costly Mistakes U.S. Small Businesses & Freelancers Make (And How to Easily Avoid Them)

Running your own business comes with freedom, creativity, and pride. But it also comes with rules — thousands of them. And if you break those rules, even by accident, you can get slapped with fines that derail your finances. The numbers show how high the stakes can be. In fiscal year 2022, the IRS assessed $73.6 billion in civil penalties, and compliance missteps remain one of the biggest obstacles for entrepreneurs. According to the MetLife & U.S. Chamber of Commerce Small Business Index (Q4 2024), 51% of small businesses reported that regulatory requirements are actively hindering their growth. And when you’re already juggling sales, clients, and payroll, the last thing you need is a surprise bill from the government. The good news? Most of these fines are avoidable once you know where the landmines are. Here’s a breakdown of 12 common small business fines, what they cost, and how to protect your business from these costly mistakes. Table of Contents 1. Late-Filing Penalty (Income Tax) This is one of the most common pitfalls for new entrepreneurs. Missing the deadline to file your business or personal tax return can trigger a significant penalty from the IRS. The penalty is typically 5% of the unpaid taxes for each month or part of a month that the return is late, with a maximum cap of 25%.  How to Avoid It:  2. Underpayment Penalty (Estimated Taxes) As a freelancer or sole proprietor, you are required to pay income and self-employment taxes in four quarterly installments throughout the year. If you don’t pay enough by the due date for each quarter, the IRS can impose an underpayment penalty. This often catches new business owners by surprise, as they may assume they can simply pay their entire tax bill in April.  How to Avoid It: For a detailed breakdown of deadlines and calculations, read our blog: The Freelancer’s Guide to the 2025 Self-Employed Quarterly Tax Schedule.  3. Misclassification Fine Misclassifying a worker as an independent contractor when they should be an employee is a major red flag for both the IRS and the Department of Labor (DOL). While using contractors can be more flexible for your business, the government has strict rules. If they determine you’ve misclassified a worker, you could face severe fines and be required to pay back taxes, interest, and other penalties. Some states impose fines of tens of thousands of dollars per misclassified worker.  How to Avoid It:  4. Forgotten 1099-NEC Penalty If you pay a contractor $600 or more in a single tax year, you are required to file a Form 1099-NEC with the IRS and provide a copy to the contractor. Many small business owners overlook this crucial step. The fines for late or incorrect filing can be steep, ranging from $60 to $330 per form, with a penalty of $660 per form for intentional disregard. The deadline is typically January 31st.  How to Avoid It:  5. OSHA Workplace Safety Fine Even if you run a small office or a creative studio, you are legally required to provide a safe working environment for your employees. The Occupational Safety and Health Administration (OSHA) can inspect your premises and issue fines for violations. For 2024, the penalty for a “serious” violation can be up to $16,550 per violation, while a “willful” or “repeated” violation can reach a maximum of $165,514. Don’t think you’re too small to be noticed; many businesses are fined for common oversights like failing to have a clear exit path or not providing basic safety equipment.  How to Avoid It:  6. ADA Website Accessibility Fine In today’s digital world, your website is considered a “public accommodation” under the Americans with Disabilities Act (ADA). This means it should be accessible to people with disabilities who rely on screen readers, keyboard navigation, or other assistive technologies.  The ADA doesn’t publish a fixed fine schedule for websites. Instead, enforcement usually happens through lawsuits or settlements. These cases can be costly—legal fees and settlements often run into the tens of thousands of dollars, and in some cases much higher. The Department of Justice can also impose civil penalties, which currently range up to $75,000 for a first violation and $150,000 for subsequent violations—but in practice, the real financial impact often comes from litigation costs.  How to Avoid It:  7. Data Privacy Violation Fine If your business collects any customer data—even just names and email addresses—you have a legal responsibility to protect it. With new laws like California’s CCPA, fines for data breaches or mishandling can be astronomical. Violations can range from tens of thousands of dollars to much more, depending on the severity and number of people affected.  How to Avoid It:  8. Unpaid Sales Tax Fine For businesses that sell physical goods (or certain taxable services), collecting and remitting sales tax is legally required. Many small businesses run into trouble because they’re unaware of their state’s nexus laws—the thresholds or connections (sales volume, number of transactions, physical presence) that trigger sales tax obligations.  Penalties and interest for late or unpaid sales tax vary widely by state and situation. In typical cases, fines might be 10–30% of the tax owed, plus interest. But in more serious cases—such as fraud, willful evasion, or repeat violations—some states may impose penalties ranging up to 50% or more of the unpaid tax.  How to Avoid It:  9. Trademark/Copyright Infringement Fine Using a protected logo, image, song, or slogan without permission can quickly turn into a legal nightmare. Many small business owners run into this problem by pulling images or music from the internet, assuming they’re “free to use.” In reality, infringement lawsuits are often far more expensive than simply licensing the material.  How to Avoid It:  10. Unlicensed Business Fine Depending on your industry and location, you may need a specific business license to operate legally. This can be anything from a home-based business license to a professional license for a service provider. Operating without the necessary license can result in fines from city, county, or