Keeping tax related records is a bit of a pain but what’s even more of a pain is when you have an audit, are trying to reproduce financial statements, or need to investigate a historical transaction. In the moment it might not feel like a big deal but it pays to keep your books in order. I also find that orderly recordkeeping reduces a lot of business owner stress. Back office stress is a distraction from the intention of a business: growth and profitability.
Regardless of the business benefits to organized recordkeeping, the IRS actualy requires you to keep financial records of your business. It doesn’t matter if you’re a profitable company or not, records must be kept. At Stride, we understand how overwhelming taxes can be and want to simplify the process for you.
We’re sharing 3 key focal points to ensure worry-free small business recordkeeping:
- Which records you’re legally required to keep by the IRS
- How long you should keep your records before tossing them out
- How to keep your records safe so you don’t misplace them
First, let’s start with the best practices for your small business recordkeeping.
- Essentially, you need to keep evidence of any documents verifying an item of income, deduction, or credit you will see on your tax return. This includes receipts, invoices, bank statements and payroll records.
- Any expenses you incur under $75 or are for transportation, meals, or lodging expenses typically don’t require a receipt. However, the IRS still wants to know when, where, and what your expense was for, like a business meeting. Consider using expensify for this solution.
These are the main types of records you actually need to keep for tax purposes. When in doubt, keep the record in question. Better safe than sorry! The best, safest approach is to keep as many records as possible.
- Deposits, both cash and credit
- Proof of payment and electronic fund transfers, including canceled checks
- Accounts payable and receivable
- Cash register tapes
- Credit card receipts
- Bank statements
- Petty cash slips
- Payroll records
- Tax filings
- Previous tax returns
- W2 and 1099 forms
How long should you keep your tax records?
On average, 3 years is the sweet spot for keeping your financial records. According to the IRS, you should maintain bookkeeping and tax records “as long as needed to prove the income or deductions on a tax return.” A general rule of thumb is to keep your documentation three years after the original tax deadline. There are exceptions to the rule:
- Any employment tax records must be kept for at least 4 years.
- In the case you withheld profit from your tax return, make sure you keep your records for 6 years.
- If you deducted the costs of bad debt or worthless securities, keep your records for 7 years.
So what’s the best way to keep your records safe?
The easier your method of keeping records, the more likely you are to maintain them and keep them safe. We suggest going paperless and storing everything electronically, creating digital copies of your documents when necessary. The IRS accepts digital records as long as they’re exactly the same as the original. Meaning, if requested, you must be able to produce a printed, legible copy of the document in question.
Scanning records is quite simple and can be done with any smartphone. After you’ve created a digital copy, tag it with a descriptive name you’ll understand and archive it. Always keep a backup of important digital documents in a secure location, like an external hard drive.
At Stride, we can help you organize your records properly as part of our accounting and bookkeeping services. We know that recordkeeping is an area that creates stress for business owners but we will work to put the systems in place to make sure nothing is missed. If you want to talk Stride, email us at email@example.com.