Many businesses aren't sure how long records must be saved in the paperless era. Record-keeping is a boring, but important business activity, and if you make the wrong choices, you risk litigation, succession planning problems and the wrath of the tax man. Understanding how long should you keep business records will help you avoid these problems. Whether you're wondering how long to keep bank statements or how long to keep pay stubs, business record retention is critical for your financial record keeping. Read on to learn about retention periods for your accounting documents.
The General Rule
The Internal Revenue Service has established some basic record-keeping rules for tax documents. Outside the tax arena, there's remarkably little guidance about how long you should keep business paperwork. Most lawyers, accountants and bookkeeping services recommend keeping original documents for at least seven years. As a rule of thumb, seven years is sufficient time for defending tax audits, lawsuits and potential claims.
- Business Tax Returns and supporting records must be kept until the IRS can no longer audit your return. In most cases, the IRS can audit you for three years after a filing, but that time period extends to six years if the IRS suspects you made a "substantial error" on your return.
- Payroll tax records, including time sheets, wages, pension payments, tax deposits, benefits and tips must be kept for at least four years after the date the taxes fell due or the date you actually paid them, whichever is later.
- Current employee files should be retained for at least seven years after an employee leaves, is terminated or retires. However, if an employee suffers a work-related accident or files a claim against the business, it's advisable to retain your records for up to 10 years after the claim is resolved.
- Job applicant information must be kept for at least three years, even if you didn't hire the applicant.
- Ownership Records, such as business formation documents, annual meeting minutes, by-laws, stock ledgers and property deeds, should be retained permanently.
- Accounting Services Records should be retained for a minimum of seven years. Accountants, being a conservative bunch, will often recommend that you keep financial statements, check registers, profit and loss statements, budgets, general ledgers, cash books and audit reports permanently.
- Operational Records, including bank account statements, credit card statements, canceled checks, cash receipts and check book stubs, follow the seven year rule.
These periods are not offered as final authority, but as a guide. Your CPA, outsourced accounting service or tax attorney may recommend a different approach for your record retention based on the rules of your industry and the specific needs of your business.