Keep seven years of documents on hand?
‘How long shall I keep business records?’
Business owners often come up with this question. So, accountants, be ready with the answer.
The IRS has established basic rules for tax documents, according to which it is better to keep original tax documents for at least seven years. Seven years is enough time for defending potential claims, lawsuits and tax audits.
Here are the specific documents to keep handy:
- Payroll tax records– Keep all payroll tax records such as payments, wages, tax deposits, timesheets, pension payments and more at least for four years.
- Business tax returns- Keep your business tax returns and supporting records unless the IRS cannot audit the return.
- Current employee files- Keep the employee files for at least seven years after an employee leaves or retires.
- Job applicant information- Keep these documents for at least three years if you didn’t hire the candidate.
The other documents that you should keep ready include operational records, accounting services records and ownership records.
It is often tempting to leave the tax documents until the last minute. The scenario looks something like this:
You get an email with the tax documents attached. You think you will organise them later, but you forget.
That is what happens every time!
There are certain accounting institutions that make electronic records accessible for only a specific period of time. And these firms let you access the data for free during that time. After that, you might have to request them separately. It’s a daunting and expensive process.
Make sure you print the email to PDF and save the latter in the cloud. It is okay if you don’t want to use any accounting software to save the data. You can use Excel sheets to record the data. Make it a point to organise tax documents regularly instead of rushing through them at the last minute.
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Follow the digital filing system for tax documents
It is better to scam copies of tax paperwork since the IRS approves scanned copies of tax documents. You can also keep both digital and paper copies of the documents. Paper forms are easier for many since you can see physically what applies during each taxation year.
Now let’s tell you what happens with the digital files.
The digital files are stored in a filing system throughout the tax year. The cloud storage platform is free for basic users. So, you can save those files on any cloud storage platform such as DropBox. That way, you will always have backups of files that you need for an audit or other reasons. Save the files in a format that includes a brief description and the data when you collected the information.
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You can try keeping your business tax documents in three separate folders- income, expenses and business. This makes verifying incomes or any other tax-related information 10X easier and faster.
Prepare a checklist for tax documents
A checklist saves time and energy. You make fewer mistakes. There is no need to rush with the documents. You manage the tax documents without having to go insane. The basics elements in a checklist for tax documents are:
- EETPS information in case the client wants to file electronically
- Social security numbers on the tax forms
- Interests paid on student loans or mortgage
- Bank account and routing numbers if you pay electronically
- W-2s, 1098’s and 1099’s and related tax documents
- Charitable donation receipts
- Child care and education costs
- Contributions to tax-deferred retirement accounts
- Proof of previously paid taxes like estimated taxes, self-employment tax, property taxes
- Other related documents
You may need different types of tax documents depending on your nature of business. Things become simpler when you have the checklist ready to organise your tax documents.
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