7 Mistakes New Home Health agencies Make in Their First Year

2026-08-21

7 Mistakes New Home Health Agencys Make in Their First Year — Photo: Abhishek Navlakha / Pexels

Avoid costly tax errors in your first year of home health agency ownership. Learn the 7 most common mistakes and how to fix them.

Starting a home health agency is a major undertaking. You have to manage patients, staff, and compliance, all while keeping the business financially sound. One area where new owners often stumble is taxes. The IRS has specific rules for home health agencies, and a misstep can lead to penalties, interest, and even an audit. Here are the 7 most common tax mistakes new home health agencies make in their first year, and how to avoid them.

1. Choosing the Wrong Business Structure

Many new owners start as a sole proprietorship or a simple LLC without thinking through the tax implications. For a home health agency, the risk of liability is high, and the tax treatment of your income matters.

What to do: Consider an S-corporation or C-corporation. An S-corp can save you self-employment tax on a portion of your income, but it requires you to pay yourself a reasonable salary. A C-corp offers more flexibility for deductions but can lead to double taxation on dividends. Consult a CPA who works with healthcare businesses to choose the structure that fits your revenue and growth plans.

Cost range: CPA consultation: $150-$400 per hour.

2. Misclassifying Employees as Independent Contractors

Home health agencies often rely on caregivers and nurses. Misclassifying them as independent contractors when they should be employees is a major red flag for the IRS and state labor departments. It can result in back taxes, penalties, and interest.

What to do: Review the IRS 20-factor test. If you control when, where, and how the work is done, they are likely employees. When in doubt, err on the side of employee classification. Use a payroll service to handle withholding and payroll taxes.

Cost range: Payroll service: $50-$150 per month plus per-employee fees.

3. Ignoring Payroll Tax Deposits

New owners often underestimate the complexity of payroll taxes. You are responsible for federal income tax withholding, Social Security, Medicare, and federal unemployment (FUTA). Missing a deposit deadline triggers penalties that can add up quickly.

What to do: Set up a separate bank account for payroll taxes. Use a payroll service that automatically calculates and schedules deposits. Mark the IRS deposit due dates on your calendar: they are typically semi-weekly or monthly, depending on your total tax liability.

Penalty range: 2% to 15% of the underpayment, depending on how late the deposit is.

4. Not Tracking Mileage and Vehicle Expenses

If you or your staff drive to patient homes, you can deduct vehicle expenses. Many new owners either forget to track mileage or use the wrong method. The standard mileage rate for 2026 is projected to be around $0.67 per mile, but you need to log every trip.

What to do: Use a mileage tracking app like MileIQ or QuickBooks Self-Employed. Record the date, purpose, and miles for each trip. Alternatively, track actual expenses (gas, oil, repairs, insurance) and deduct the business percentage. Compare both methods at year-end to see which gives you a larger deduction.

Cost range: Mileage apps: $0-$60 per year.

5. Overlooking Home Office Deduction Rules

If you run your agency from a home office, you may be eligible for a deduction. But the rules are strict: the space must be used regularly and exclusively for business. Many owners claim too much or too little.

What to do: Measure your office square footage and calculate the percentage of your home used for business. Use the simplified method: $5 per square foot, up to 300 square feet, for a maximum deduction of $1,500. Or use the regular method, which requires allocating actual expenses like mortgage interest, utilities, and repairs. Keep a log of business use.

Note: If you have an outside office, you generally cannot claim a home office deduction.

6. Failing to File Form 1099-NEC for Contractors

If you pay any independent contractor $600 or more in a year, you must file Form 1099-NEC with the IRS and provide a copy to the contractor. Missing this deadline (January 31) results in penalties starting at $60 per form, up to $630,000 for large businesses.

What to do: Collect W-9 forms from all contractors at the start of the relationship. Use accounting software or a service like Track1099 to prepare and file the forms electronically. Set a reminder for early January.

Penalty range: $60-$280 per form, depending on how late you file.

7. Not Setting Aside Money for Quarterly Estimated Taxes

As a business owner, you are responsible for paying taxes throughout the year. If you expect to owe more than $1,000 in federal taxes, you must make quarterly estimated payments. Many new owners skip this and face a surprise tax bill plus penalties.

What to do: Work with your CPA to estimate your annual income and tax liability. Pay 25% of that amount each quarter (April 15, June 15, September 15, January 15). Use IRS Form 1040-ES. Set up a separate savings account and transfer a percentage of each client payment into it.

Penalty range: The IRS charges interest on underpayments, currently around 8% per year, plus a failure-to-pay penalty of 0.5% per month.

FAQ

Can I deduct the cost of starting my home health agency?

Yes, you can deduct up to $5,000 in startup costs in your first year, with the remainder amortized over 180 months. These include costs like licensing, marketing, and office setup.

What is the best way to pay myself as an owner?

If you are an S-corp, you must pay yourself a reasonable salary, which is subject to payroll taxes. Any additional profits can be taken as distributions, which are not subject to self-employment tax. A CPA can help you determine a reasonable salary.

How long should I keep tax records?

The IRS recommends keeping records for at least 3 years, but for assets like equipment, keep them for as long as you own the asset plus 3 years. For employment tax records, keep them for 4 years.

What if I miss a tax deadline?

File as soon as possible. The IRS offers penalty relief for first-time offenders in some cases. You can also request an extension on filing, but not on paying. Interest and penalties will accrue, so act quickly.

The bottom line

Your first year as a home health agency owner is a learning curve, but tax mistakes can be avoided with planning and professional help. Focus on proper classification, timely deposits, and accurate record keeping. Set aside money for taxes from day one, and work with a CPA who understands the healthcare industry. A little upfront effort can save you thousands in penalties and stress.

Take action this week: review your business structure, set up a payroll system, and start tracking mileage. Your future self will thank you.