Is now the right time to get rid of old paperwork?
How long do you really need to keep your business records? In fact, you can be downright inundated with records… from tax returns and expense receipts to invoices, cancelled checks, payroll records, bank statements, meeting minutes—the list goes on.
Whether you have everything methodically stored in a filing cabinet or stashed out of sight in a desk drawer, you’ve probably asked yourself, do I really need to keep all this?
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Record keeping isn’t fun. And outside of the tax world, there are few rules and little guidance on exactly what should be kept and for how long. Conventional wisdom when it comes to documentation is “better safe than sorry.”
However, instead of stockpiling everything, it’s smarter to have an overall plan for keeping your records to make sure you keep the important stuff.
So I’ve got some advice for you about record-keeping.
Keep in mind that what follows is just general guidance, and not necessarily the final word. Your accountant or tax advisor may have different recommendations for your situation.
Business Tax Returns
You’ll need to hang onto your business tax returns and all supporting documentation until you can no longer be audited for that tax year. In the US, the IRS requires companies to keep their business tax returns for at least 3 years from the time of tax filing.
But don’t crank up the paper shredder on Year 3. The IRS also says that it can come after your business for failing to report income for up to 6 years after filing and for up to 7 years if you took a deduction on a bad debt. That’s why most accountants recommend that you hold on to your tax return and all supporting documentation for seven years from filing. You can read more about the IRS’ document requirements here.
Payroll Tax Records
If you have employees, the IRS recommends that you keep all employment tax records for at least four years from the time you paid the taxes or filed the return (whichever is later). These records include timesheets, employee information, and benefit payments.
In addition to employee tax information, you should keep all human resources files for any employee, current or former. These records include anything like resumes, job applications and descriptions, performance reviews, and any employee files.
Experts advise that you keep these documents for at least seven years after an employee leaves or is fired. In addition, if an employee was injured on the job, you should keep any related records for up to ten years after worker’s compensation was paid.
Job Applicant Information
In the US, there are several federal anti-discrimination laws that apply to recordkeeping and hiring. For example, Title VII, the Americans with Disabilities Act (ADA), and the Age Discrimination in Employment Act (ADEA) all impact how you handle your hiring records if your business is over a certain size.
For Title VII and ADA, the requirements kick in when you have 15 or more employees; it’s 20 or more employees for ADEA. If your company meets these requirements, you’ll need to keep all hiring records for each position for at least one year from the date of the hiring decision.
Ownership Records and Other Key Business Documents
There are certain documents that need to be kept indefinitely. These include your company formation documents, such as articles of incorporation (for corporations) and articles of organization (for LLCs).
If you’re a corporation, you’ll also need to keep any director or shareholder meeting minutes and a stock ledger. Other key ownership and business documents should be kept permanently including deeds, titles, property records, and any contracts.
Bank statements, credit card statements, canceled checks, paid invoices and other financial information quickly pile up.
Accountants typically will advise businesses to keep their bank account and credit statements for 7 years. However, if your monthly statements aren’t serving any tax or other business purposes, you can consider shredding them after a year and keeping your detailed annual statements on hand for 7 years.
Paper vs. Electronic Records
In the digital world, recordkeeping is simpler—and takes a lot less physical space! The IRS has determined that electronic records are the same as paper originals. In some cases, electronic is preferred, since paper receipts can fade and become illegible over time. But, if you’d prefer to store all your files digitally, feel free to do so.
However, one word of caution: it’s easy to rely on your financial service provider (such as your bank or credit card company) to access your account information and history. For example, you might log into your online account to view monthly or yearly statements.
Be sure to check the terms of each account to see how long they keep historical records. If it’s shorter than 7 years, you may need to download and save an annual statement in order to have it on hand for tax recording.
Lastly, keep in mind that you’ll need to keep originals for important documentation. These are things like articles of incorporation, business licenses, partnership agreements, and any signed contracts.
Many companies store such documentation in a corporate binder. Keep the binder in a safe space (even if it just collects dust). It’s one of the first things that will be requested should you want to sell your company or be involved in an audit or lawsuit.