Record keeping can be a daunting task, especially for large companies that store a lot of data. Nonetheless, it is essential to do it right. Big businesses have many employees, business partners, and clients, which means that their records contain a lot of sensitive information. If not handled properly, this data can easily get exposed and get your company in trouble.
Smaller businesses also need good record-keeping, and while it might be easier for them to keep their records organized, they sometimes forget or underestimate the importance of this practice.
Good record-keeping can help businesses track their business progress and use this data to make more informed decisions in the future. It can also help keep track of business expenses and separate personal and professional expenses. Additionally, keeping your business records neat can help you project your tax liability and prepare tax returns.
Bad record-keeping practices can not only make your business operations more difficult, but it can also get you in legal trouble. In case of an audit, you have to provide certain records to authorities, so it is essential to properly store them.
Let’s see how long you should keep different types of business records.
When it comes to your business tax returns, you’ll have to hang on to all relevant documentation until you can no longer be audited for that tax year. The IRS requires all US companies to keep their business tax returns for at least 3 years after the tax filing.
However, it’s better to keep those records for at least 7 years, as the IRS might come after your company if you fail to report income even 6 years after tax-filing.
The IRS also suggests that you keep all of the employment tax records for at least 6 years after they were due or paid. Employment tax records include anything from names, addresses, and social security numbers to dates of employment, occupations, wages, pension payments, tax deposits, and other important files.
Financial records are a pretty broad category. They include everything from bank account statements and credit card statements, to paid invoices, cash receipts, and canceled checks.
Most accountants would advise companies to hang on to their bank account and credit statements for up to 7 years. However, these records can quickly pile up. If monthly statements aren’t necessary for tax or any other business purposes, you can get rid of them after a year and just keep detailed annual statements for at least 3 years and up to 7 years.
While the 7-year-rule is a good rule of thumb, you should keep records such as budgets, profit and loss statements, cash books, general ledgers, and audit reports permanently.
While it might not be as obvious as keeping tax records, most companies are actually legally obliged to keep their communication records, especially in the industries dealing with sensitive information such as the healthcare industry, the financial industry, and the education sector.
The industry and the location of your business determine how long your email retention policy should be.
For example, while pharmaceutical companies are required to keep their email records for only 2 years, healthcare companies have to abide by much stricter regulations and retain their emails for at least 7 years, required by HIPAA.
We already touched upon employment tax records, but you probably have many other employment files related to both your current and former employees, as well as the applicants who never got hired. These records encompass documents such as job applications, resumes, job descriptions, performance reviews, and other important employee files.
You should retain the files relating to your current employees as long as they are working for you and for at least 7 years after an employee has left or has been fired.
Additionally, if an employee gets injured on the job, any related records should be kept for at least 7 years after the matter was resolved, or up to 10 years after worker’s compensation was paid. If an employee filed a discrimination claim against your company, you should retain those records for at least 4 years after the case is finally resolved.
These are not the only types of records a business should keep. Nowadays, companies are collecting and storing more data than ever, and knowing exactly what you should keep and for how long can be challenging.
Sticking to some general rules of thumb, such as a 7-year rule that works in most situations, can help you avoid any potential issues.
Luckily, you don’t have to manually deal with your business records, and you can use various useful tools that will not only help you store important data digitally but also expunge unnecessary data after the set retention period has expired.
Keep in mind that you won’t always be able to go through with your usual record disposal plans. For example, if your business is pending litigation, you might need to hold on to your records for longer than initially planned.
When it comes to specific record-keeping rules, retention policies, and disposal policies, it’s best to consult with your attorney and determine which are the best practices for your particular business and circumstances.