How Long Does a Business Need to Keep Records?

How well are you maintaining your business records? While the IRS requires companies to do proper record keeping, keeping good records also can increase the likelihood of business success. Not only does good recordkeeping help you monitor the health of your business, but it can also save you money, time, and effort if you get audited or sued.

The IRS requires taxpayers to keep all documents that affect income, expenses, deductions, and credits. Small business owners have the burden of proof if they get audited. If you don't have all the necessary data and records handy during an audit, you may end up paying unnecessary taxes and penalties.

Business Records You Need to Keep

1. Business Tax Returns

Save copies of your tax returns and any supporting documents. You may need them for audits, legal disputes, lease applications, and business loan and grant applications.

2. Payroll Tax Records

Keep employee payroll records, tax filings, and tax payments. Payroll records include timesheets, wage calculations, added benefits, pension payments, and any documentation used to determine employee wages. The Department of Labor also requires every employer covered by the Fair Labor Standards Act (FLSA) to maintain certain records of workers.

3. Employee Files

Even though employee records may not be directly related to your , they should also be saved. These include full names of employees, Social Security numbers, dates of birth, copies of IDs, resumes, W-4 forms, performance reviews, job application files, and any other pertinent information. U.S. Citizenship and Immigration Services requires employers to keep any records, such as I-9 forms, that confirm employees are allowed to work in the United States.

4. Key Business Documents

Essential organizational documents should be readily available. These documents include articles of incorporation, a tax ID (EIN) confirmation letter, partnership agreements, and shareholder agreements and resolutions. Other key business documents that should be saved include important minutes from meetings, stock ledgers, lease agreements, and other contracts.

5. Operational Financial Records

Bank accounts, purchasing receipts, paid invoices, copies of canceled checks, credit card statements, records of inventory, and documents related to the purchase of other assets are necessary to prove tax deductions. Keep detailed records of expenses for travel, entertainment, and business gifts, in case you get audited.

Cash register tapes, deposit information for cash and credit sales, receipt books, customer invoices, and 1099 forms also should be kept to support your business income.

How Long Should You Keep Your Business Records?

Tax Returns and Supporting Documents

Keep copies of tax returns and other related records for up to three years from the date you filed your return. The IRS, however, may audit your business up to six years later if they find failure to report income. Most experts recommend keeping tax returns records for no less than seven years. If you never file a return, the IRS suggests you keep your records indefinitely.

Employee Documents

The IRS recommends that businesses keep employee tax records for at least four years. You also should keep payroll records and payroll tax records, which include timesheets, wage calculations, added benefits, pension payments, and tax deposits, for at least seven years. If an employee gets injured while at work, OSHA requires companies to retain those records for five years.

How to Store Your Business Records

Digitizing your records is the easiest and safest way to keep track of your records. With virtual record keeping, you don't need to worry about taking up too much physical space and having to protect your documents from water and fire damage. Also, when records are digitized, it's much easier to locate a specific document anytime you need it. The IRS accepts digital copies of receipts, invoices, and other documents as long as they are copies of originals and are readable.

Ways to save your digital copies include:

• Buy an external hard drive to save additional backup copies of your records.
• Use a cloud storage service like Google Drive and Dropbox. These websites allow you to scan and store your files in digital formats.
• Online bookkeeping software such as QuickBooks Online, Xero, and Wave will keep your invoices, transactions, and financials in the cloud.
• Move your computer to a leading cloud data warehouse like Microsoft Azure and Amazon Web Services (AWS). Your data can be accessed from anywhere in the world as long as you have internet access.

What If You Lose Your Records?

If you're facing an audit and don't have immediate access to all of your records, here are ways to access them:

1. Download Records From Your Bank Account

Banks keep records of all your transactions. If you need access to data that's no longer available online, simply contact your bank for assistance

2. Ask Other Parties

Your suppliers may keep the invoices they have sent you, as well as other purchasing receipts. You can also ask your partners, clients, and other parties if they have copies of past transactions.

3. Contact Your Accountant

A tax specialist can help you to reconstruct all of your missing reports as well as give you advice on how to deal with the IRS and reduce your risk of getting penalized.

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