What Houston Business Owners Get Wrong About Tax Season (and What It Costs Them)

Every January, I get a version of the same phone call. A Houston business owner (usually self employed, usually running an LLC) realizes they received both W-2s and 1099s for the year. They have no idea what to do with the 1099s. They haven’t made quarterly estimated payments. And their filing deadline is 11 weeks away.

By the time they call me, the situation is already expensive. Not because tax law is punishing. It’s actually logical once you understand it. The expense comes from not knowing the rules until after you’ve already broken them.

Here’s what goes wrong for Houston business owners during tax season, what it actually costs, and where the confusion comes from.

The 1099 Surprise

This is the most common first year mistake for anyone who picks up freelance work or starts a side business while still working a W-2 job.

I had a marketing manager in Midtown who took on three consulting clients in 2024. She earned $38,000 from consulting on top of her $85,000 salary. Her employer withheld taxes from the salary. Nobody withheld anything from the $38,000.

When she sat down to file, she owed $10,640 in additional federal taxes on that consulting income. That’s $5,814 in self employment tax (15.3% of net earnings) plus $4,826 in income tax at her marginal rate. She had $0 set aside for it.

The 1099 income wasn’t a surprise. The tax bill was. And because she hadn’t made estimated payments throughout the year, the IRS added a $247 underpayment penalty on top.

How Estimated Payments Work

The IRS expects taxes to be paid as income is earned, not all at once in April. For self employed individuals and anyone with significant non W-2 income, that means quarterly estimated payments:

• Q1: April 15
• Q2: June 16
• Q3: September 15
• Q4: January 15 (of the following year)

The underpayment penalty is essentially an interest charge. The rate changes quarterly. For 2025, it’s 7% annually. On a $10,000 underpayment carried all year, that’s roughly $700 in penalties. Not catastrophic, but completely avoidable.

The safe harbor rule: if estimated payments equal at least 100% of the prior year’s tax liability (110% if adjusted gross income exceeds $150,000), there’s no penalty regardless of how much is owed at filing. This is the rule most Houston business owners don’t learn until their second year of self employment.

The Deduction Gap

I reviewed a contractor’s return last year. A general contractor in the Heights doing residential renovations. He earned $210,000 and claimed $48,000 in deductions. His actual deductible expenses were closer to $79,000.

The $31,000 gap existed because of three problems:

No separate tracking for vehicle expenses. He drove a Ford F-150 for both business and personal use. Without a mileage log or a clear record separating the two, his CPA took the conservative route and deducted only documented fuel receipts. The standard mileage rate for 2025 is 70 cents per mile. At 15,000 business miles per year, that’s $10,500 in deductions versus the $3,200 he claimed in fuel receipts.

Home office deduction never claimed. He runs the business from a dedicated room in his house. The simplified method allows a $5/square foot deduction up to 300 square feet. That’s $1,500 with zero paperwork beyond measuring the room. He didn’t know it existed.

Uncategorized expenses. Job site materials purchased at Home Depot on Richmond went on a personal credit card and never made it into the books. Tools, safety equipment, subcontractor payments in cash. All legitimate deductions, all undocumented.

The cost of missing $31,000 in deductions at a 24% federal tax rate: $7,440 in unnecessary taxes. Plus the 15.3% self employment tax on the portion that would have reduced net self employment income: another $4,743.

Over $12,000 left on the table. Not because the deductions didn’t exist. Because nobody tracked them.

Texas-Specific Traps

Texas has no state income tax. That’s the good news. The bad news is that people hear “no state income tax” and assume Texas is a low paperwork state. It isn’t. The complexity just lives in different places.

Sales Tax

Houston’s combined sales tax rate is 8.25% (6.25% state + 2% local). Businesses that sell taxable goods or services file sales tax returns with the Texas Comptroller. Monthly, quarterly, or annually depending on volume.

The trap: timely filing discounts exist but expire. Businesses that file and pay sales tax on time keep 0.5% of the tax collected (up to $500/month for most small businesses). Miss the deadline by a single day, and that discount disappears. A restaurant in the Galleria area that collects $8,000/month in sales tax loses $40/month ($480/year) every time they file late.

Late filing penalties are steeper: 5% if 1 to 30 days late, 10% if 31 to 60 days late, with additional penalties after that.

Texas Franchise Tax

Every LLC, corporation, and partnership in Texas owes franchise tax unless their total revenue falls below $2.47 million (2025 threshold). Most Houston small businesses fall below this threshold and owe nothing, but they still have to file the No Tax Due report annually. The deadline is May 15.

Business owners who ignore the franchise tax filing (thinking “I owe nothing so I don’t need to file”) risk forfeiture of their business entity status. The Texas Comptroller will forfeit an LLC or corporation for failure to file, which means the liability protection disappears. Reinstating a forfeited entity costs money and creates a gap in legal protection that no one wants to explain to a judge.

Property Tax Considerations for Home Based Businesses

Harris County appraises property annually. Business owners who claim a home office deduction on their federal return aren’t required to report it for property tax purposes in Texas. But business personal property (equipment, inventory, furniture used in a home based business valued over $500) is subject to a separate rendition filed with Harris County Appraisal District by April 15.

Most small home based businesses fall under the threshold. But a photographer with $15,000 in camera equipment or a contractor storing $20,000 in tools at home should be aware the requirement exists.

The Recordkeeping Problem

The IRS doesn’t audit randomly. Certain patterns trigger reviews: high deductions relative to income, large cash transactions, mixed business and personal accounts, and round number entries that suggest estimation rather than documentation.

I had a client in Sugar Land (a physical therapist running a private practice) who got audited in 2024. The audit covered tax year 2022. She kept good records for income but had gaps in expense documentation. Three categories caused problems:

Continuing education. She attended two conferences in 2022 totaling $4,800 in registration, travel, and lodging. She had credit card statements showing the charges but no receipts breaking down the expenses by category. The IRS disallowed $1,200 because she couldn’t separate the personal portion of a combined business/vacation trip.

Client meals. She deducted $3,600 in business meals. The IRS requires documentation of the business purpose, who was present, and the business relationship for every meal over $75. She had credit card charges. She did not have notes. The IRS disallowed $2,100.

Mileage. She claimed 8,000 business miles. Without a log, the IRS reduced it to the miles she could verify through appointment records: 5,200. Lost deduction: 2,800 miles at $0.655/mile equals $1,834.

Total additional tax owed after the audit: $2,847 plus interest. The audit itself required 12 hours of her time gathering documents, plus $1,800 in CPA representation fees.

The documentation that would have prevented all of it: a mileage tracking app, a note on each meal receipt, and separate credit card charges for personal and business portions of conference travel.

The Extension Misconception

Filing an extension is not a problem. The IRS grants automatic six-month extensions (to October 15 for individuals) with Form 4868. No explanation needed.

But an extension to file is not an extension to pay.

Tax is still due by April 15. The extension gives extra time to prepare the return, not extra time to come up with the money. Interest accrues on unpaid balances from the original due date, and the failure to pay penalty (0.5% per month) starts April 16 if a balance is owed.

I see Houston business owners file extensions every year as a strategy to “buy time.” The extension is free. The late payment is not. On a $15,000 balance, the monthly cost of waiting is $75 in penalties plus roughly $87 in interest (at 7% annual rate). Filing in October instead of April costs approximately $972 in penalties and interest on that balance.

The right move: file the extension, but send a payment with it. Even an estimated payment that covers 90% of the liability eliminates most of the penalty exposure.

When Tax Season Stops Being Stressful

Tax season is stressful when it’s the first time you’ve looked at your numbers all year. Business owners who do monthly bookkeeping and quarterly tax reviews don’t panic in January because they already know the number. They’ve been watching it build all year.

The difference between a business owner who dreads April and one who files in February: 12 months of organized records versus 11 months of ignoring the problem and one month of frantic catch-up.

That’s not a tax problem. It’s a bookkeeping problem. And bookkeeping problems are fixable at any time of year.

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EZQ Group handles tax preparation and year-round bookkeeping for Houston small businesses and self-employed professionals. Reach out to get your books in order before the next deadline.