Do you dread when you shred? Review your document retention rules and rely on a secure record shredding company to cut down on your paper pile.
The SBA says small business owners are big time paper hoarders.
According to a recent survey published by the Small Business Association (SBA), while no universal document retention standard exists for small businesses, companies with fewer than 50 employees are by far the biggest paper stackers. But holding on to your small business documents too long can create liabilities and risk. Toss them too soon and you could be facing an IRS audit without proof of your business expenses needed to write them off.
No matter what business you’re in, there are very real consequences that come with holding on to paper too long.
Are you the primary document manager in your business? Take a look at your document retention policy and take a few notes. How often you keep a certain document depends on the business you’re in and how many employees you have.
No doubt, the most sensitive documents small businesses keep track of are also the most ambiguous when deciding when to purge. Many small business owners use accounting software programs or have their own accountant keep their books. According to the IRS, when it comes to records retention, the volume and type of records you keep determines how long you should keep a paper trail.
Avoiding an IRS audit is paramount to the small business owner, but entrepreneurs often fail to anticipate future litigation from former employees, payment conflicts with vendors, or errors within your own accounting system. Whether you prepare your own books or use an outside consultant, retaining your records for the correct amount of time isn’t an exact science. But there are some good guidelines out there that most CPAs follow themselves and advise their clients to follow.
Here’s a list of financial documents that small business owners must retain for specific time frames, courtesy of the New Jersey State Society of Certified Public Accountants (NJSCPA):
Forever – Balance sheets, financial statements, check registers, cash disbursements and receipt records, income tax returns, payroll tax returns, sales tax returns, profit and loss statements, journal entries, general ledgers, and investment sales/purchases.
Seven Years – Accounts payable, accounts receivables, bank statements and reconciliations, vendor invoices, petty cash records, purchase orders, expense reports and charge and cash sales slips.
Four Years – FICA/income tax withholdings.
Three Years – Bank deposit slips and budgets.
Corporate Records and Fixed Assets
Whether you’re conducting an internal audit of your own or hiring an outside auditing firm, your fixed asset records (all receipts and correspondence related to your copiers, cell phones, computers and the like) need to be kept forever, assuming you’re depreciating their value each year with the IRS. There are a few notable exceptions, though:
Six Years – Internal Audit Records
Seven Years – Charitable Contributions
Five Years – Accounting Correspondence
Human Resources and Payroll
Depending on your number of employees and your employee turnover, human resources and payroll records can be overwhelming and growing by the day. But keeping these records can help protect your business during employee disputes. Most of the human resources and payroll records must be kept while the person is employed with your company and can then be safely disposed of as follows:
Forever – Retirement plan agreements and employee W-2 forms.
Ten Years – Worker compensation benefits, employee withholding exemption certificates and payroll records.
Seven Years – Attendance records, medical benefits, performance records, personnel files, payroll checks and time reports.
Five Years – Safety reports, garnishments and life insurance benefits.
Three Years – Family and medical leave and contractors (from date of contract completion).
Record Storage and Purging
Keeping your records can consume a massive amount of space. Luckily there are companies that provide safe and secure document storage and management. By using one of these services, you can reduce your office clutter and save about 25 percent of your valuable filing cabinet space.
In order to access the most used records, small business owners should keep at least the past two years of records in the office. This will allow you to easily find the information you are looking for, whether it is to compare costs and/or contracts to make better decisions for your business.
With the sudden increase of identity theft, it is imperative that you store and dispose of your documents in accordance with both federal and state regulations. Many document management and storage companies can assist you in properly storing and purging your records. For those who are tackling record retention without the assistance of an outside company, consult your CPA for proper storage and disposal compliance.
The easiest, securest and most-efficient way to store the records is by digitizing them and keeping the data files stored in a professional cloud-based storage system. Once the documents and files are scanned, and the data files are transferred and backed up, the paper records can be destroyed beyond recognition.
For more information on Document Management, contact us today for a FREE Consultation!