Being an entrepreneur comes with a lot of paperwork. All of those receipts, invoices, tax forms, credit card statements and payroll forms can quickly become overwhelming. But don’t succumb to the temptation to shove them all in a drawer and forget about them. Follow these tips to help you wrangle those records:
The importance of keeping records
Record keeping can be tedious and time-consuming, but according to the IRS, it’s a critical practice every small business should follow. Well-kept records are helpful for both revealing your biggest expenses and tracking your company’s growth, while also making tax season less of a hassle. Furthermore, if your business is ever subject to an IRS audit, having your records in order will help you navigate the process smoothly.
Keeping things tidy
While organizing records in file cabinets and manila envelopes may work for some business owners, you have other options. Going paperless can make your records easily searchable and transferable. Ryan Lasker, a small business accounting expert, recommends purchasing accounting software for your company. With it, you can more easily keep track of deductions you might have otherwise missed. However, Lasker further explains you can opt for payroll software, which makes it easy to produce critical documents like W-2 and 1099-MISC forms.
According to Rosemary Carlson, a contributor to The Balance Small Business, your employees’ records should be kept for a minimum of four years, while your general tax records should stick around for at least three years. However, Lasker recommends erring on the side of caution, and keeping records for a minimum of seven years, since the IRS is allowed to audit your company for as far as seven years back — or even further if you’re suspected of malfeasance. Always consult a legal or accounting professional before eliminating any documents.
Backups and security
Both physical and digital documents need to be kept away from prying eyes and danger. Lasker suggests keeping a digital copy of your paper records, as well as keeping copies of records at separate locations — just in case one location gets destroyed. Digital documents that contain sensitive information, like social security numbers, should be kept encrypted. And while cloud storage is a convenient way to manage your digital files, Lasker warns you should protect your account with two-factor authentication and a long, complex password.
Types of important records
Important records include receipts, invoices, credit card statements and canceled checks. However, you may need some direction when it comes to organizing all of that paper. The IRS breaks records into categories, based on what they document: assets, employment taxes and travel, entertainment and gift expenses, gross receipts, purchases, and transportation. Since employee payroll tax deductions are exceedingly complex, Carlson emphasizes being particularly fastidious with your employees’ records.
What to do about missing records
Can’t find a critical receipt, but need to justify a tax deduction? Lasker suggests contacting the vendor you purchased from, along with your financial institution, to see if you can get a copy of your records. On a different note, if your clients’ or employees’ sensitive information is missing or stolen, Lasker says to inform them of the data breach so they can take appropriate action to monitor their accounts and identity.
Want to learn more about keeping records? Consult with a tax professional or a business advisor for additional insight.