You know that good record keeping is part of running a small business, but you arent sure how long to keep business records and documents. The last thing you want to do is shred some business documents that you later needbut at the same time, you dont want to hang onto a lot of paper unnecessarily.
In this article, well look at different types of business records, why its important to hang onto some of them longer, and what the timeframe is for keeping them.
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What are Business Records?
Business records is a broad term that encompasses any documents, invoices, or receipts that are involved in running a business. Lets look at different categories of business records.
There are a variety of financial records and reports that you use in bookkeeping, including:
- Receivable ledgers
- Profit and loss statements
- Balance sheets
- Bank statements
- Property records
- Business receipts
Human Resource Records
If you have employees (or contractors), there are also legal documents that youll need to keep:
- Payroll records
- Employment tax records
- Personnel records
- Employee reviews
- Income information
- Workers compensation details
The IRS is known for being a stickler about you needing the right legal documents to file your taxes, so keep these organized together:
- Annual tax return
- Tax forms (W-2 and 1099)
- Letters from the IRS
Other Corporate Records
There are other documents that you may need to keep close:
- Insurance policies
- Receipts for large purchases
- Warranties on equipment
- Statements for business credit cards
Business Documents: How Long to Keep Business Records
Whether theyre digital or physical, some business and tax records need to be saved for several years. Some financial records might be used by the IRS or lenders, and you might need them for up to seven years. Other documents, you might need even longer.
Lets look at those general categories of business documents and how long you need to keep each.
Its recommended that you hang on to your accounting records for seven years. Some accountants suggest keeping things like financial statements, profit and loss statements, and audit reports indefinitely. Likely, your accounting software allows you to run these reports at any time, so there may be no need to create paper files for them.
Human Resource Records
Keep employee records for seven years after the employee leaves the company. The employee I-9 form should be kept three years after hire or one year after termination. Keep these separate from the employee records. Also, keep payroll records for three years.
Be aware that you now house sensitive information like Social Security numbers, and should take measures to protect that data. If you have paper copies, make sure theyre locked away.
Well talk more about what tax records to keep in a minute, but in general, you should hang onto tax returns and business receipts for three years, because, in general, the IRS wont audit you after that point unless it suspects you made a substantial error in filing.
If you have employees, keep 1099 or W-2 forms for four years.
The Importance of Keeping Business Records
It can be confusing to have so many periods to keep business records. Thats where having a
document retention policy can be helpful. It can outline how long you keep each type of business document, how youll store it, and how youll ultimately destroy it.
But why keep these records, anyway? Well, for starters, you sometimes need to have access to important documents for tax purposes or to borrow money. You may simply want to go back and compare one years financials to this years. Or you might need information about a past employee.
The point is: you dont know what youll need down the road, so its best to follow guidelines and hang on to documents. If space is an issue, you can scan them and store them in the cloud.
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Receipts to Keep for Taxes
Will you or wont you be the victim of an IRS audit? Theres no way to know, so your best bet is to ensure you have any payroll or tax documents that you might be asked for on hand.
Keep receipts for business purchases for three years. The IRS might have a question about business expenses on your income tax return, so youll want to be able to prove the purchase was business-related. This will also come in handy if you claim a deduction or depreciation for equipment.
Also, hang on to payroll and employee income records for tax purposes. You may need to prove that an employee worked for you the number of hours they claimed.
If you have a tax deduction for bad debt, keep those records for seven years.
And remember: it never hurts to keep business records and income tax returns longer than the required time.
Business Records to Keep for Financing
Now onto financing. If you apply for any of the best business loans out there, youll be asked for supporting documents like your tax returns, bank statements, and financial documents. If you dont have solid business credit scores, you may also be asked for a personal financial statement and details about your personal gross income.
Having these organized and easily accessible will make applying for financing easy and fast.
Navs Verdict: Keeping Business Records
As a business owner, its in your best interest to keep your business records organized and easy to find. It may require some work initially, either filing them based on the year or type of document, or scanning them to save space and then shredding the paper. But your effort will pay off in the long run if one day the IRS or a bank asks for these documents.
This article was originally written on September 16, 2020.
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