How Long to Keep Tax Records for Business
Are you working a 1099 job or an entrepreneur wondering how long to keep a tax record for business? Maybe you are someone swamped with paperwork and wondering if you really need to have this entire library on record.
If you find yourself nodding your head to either of the questions, then you are in the right place. This article will answer all your questions on tax record collection and how long to keep tax documents for your business.
The U.S. Internal Revenue Service (IRS) has established some basic rules for how long businesses have to keep their tax records. We'll walk you through all the details for all the different industries and circumstances.
Basic tax record retention rules for business
Here are some of the basic records that you must retain at all times.
- Employees' tax records
If your business has employees, then you must retain all the tax records for each employee. You must keep records of employment tax records for at least four years after the tax became due or paid in full.
These tax records include several other items such as
- Employer Identification Number
- Dates of employment
- The job description of each employee
- Record of all sorts of fringe benefits and compensation
- Business income tax returns
Remember always to keep a copy of your business' income tax returns. Moreover, you must permanently keep a record of any relevant correspondences between your company and the IRS. You never when you may need these supporting documents as evidence to prove your compliance.
IRS also recommends that you must retain any supportive documents pertaining to your business gross income claim until your tax return's period of limitation expires.
Other documents you may need to save
Apart from the two above-mentioned essential records you must keep, here are other documentations that you must maintain a record of.
- Cash and credit sales deposit information
- Cash register tapes
- Proof of electronic funds transfers, payments, cheques
- Proof of cancellation for payments. (manual or electronic)
- Canceled checks
- Bank statements
- Credit card statements
- Accounts payable and receivable record
- Payroll records
- W2 and 1099 forms
- Tax filings
- Previous tax returns
That said, you may not need these documents for paying your taxes or filing for tax returns. However, it is always safe to be sorry, just in case you may need them for tax purposes in any future disputes or investigation by the IRS.
Other business documents you may require are
- Your business contracts with stakeholders or business partners such as vendors, clients, contractors.
- Your Business permits
- Articles of incorporation
- Your business' health and safety or other regulatory licensing documents.
- Annual Financial reports and financial statements
Remember, as a 1099 contractor running a business; you will have to bear the burden of proof. Meaning you will be obligated to produce all tax return documentation. Therefore, the most effective way to do this is to establish a mechanism to maintain records and know how long to keep tax records for the business.
Are there any exceptions?
Of course, you cannot keep a record of every penny you spend. Sometimes you spend a very little amount on a business meal or travel expense. However, do not throw that receipt yet.
Why? Because you are never completely off the hook when it comes to IRS audits. They can even grill you on your tax matters for expenses under $75.
In case you lost a receipt for such expense, you will have to inform IRS what the expense was for, the amount, when, and where you spent it.
How long should you keep business records?
Generally, you must keep the tax record, business records and receipts for a minimum of three years. The three-year rule is in place so that the IRS has up to three years to audit you and assess additional taxes. However, here is a quick list of individual documents and their record retention limits.
For employment tax records
You must hold each of your employee records for at least four years from the day tax became due or when you paid it in full (whichever comes later). You must maintain this record for four years even after the employee has left the company.
For past tax returns
You must hold the past tax returns for the last three years.
The limit to how long you must keep any receipts for taxes in three years as well.
For other financial records
It does not matter if a financial record is about your profits, small business dealings, or other miscellaneous purpose; IRS can ask to produce them for audit. Therefore, you must maintain these records for a minimum of three years.
For omitted income from your tax returns
If you have omitted any income from your tax returns, then you must keep a record for at least six years.
For deducted cost of bad debts
Have you been deducting costs associated with worthless security and/or bad debts? In this case, you must keep a record of all your tax records for a minimum of seven years.
How long to keep tax records for business in general
If you want us to give you a general answer, then three years is a minimum to hold your tax records. However, IRS emphasizes that 1099 contractors must hold their 1099 tax write-offs and records for as long as they can. This will help them prove their income and deduction when they file for tax returns.
Most importantly, if any future discrepancies arise, the IRS can ask for any of these records during a tax year.
Why three years?
The reason is previously mentioned "Period of limitations." This refers to amended returns and the time which a 1099 contractor can make changes to the tax returns. Moreover, if IRS wishes to conduct an audit on any of your tax returns, they will do it within three years from the due date or the full payment date.
Are there any exceptions?
There are certain scenarios when the answer to how long to keep tax records for business may change from three years to a longer duration.
- In case you file a fraudulent return or forget to file a tax return at all. Especially when trying to evade taxes and getting caught in the act, IRS will keep coming after you, which means you will now have to maintain the records forever.
- In case you have tax records connected with a third-party. For example, if you sell an asset associated with your business to someone else, you will need to keep a record of all previous tax returns for the time when you owned the asset. If the other party falters, IRS may trace it back to you and even ask you to produce your evidence of being compliant.
What if you lose your tax return records?
You must keep a record of all your tax returns as part of the tax records. Not only can you file for an amended tax return via these records, but these can also help you prepare your future tax returns.
In case your original tax return records are lost or destroyed, you can always obtain a duplicate transcript or copy of your tax returns from the IRS. You can do this by contacting the IRS via the website, email them, call or send a written request.
Is there a set format to keep tax records for business?
There is no set formula or format defined by the IRS, and you can use your personal record-keeping system. You are safe as far as it has a transparent view of all your income and expenses. You can even look for a paperless solution to store all your tax records electronically.
IRS accepts digital copies of tax records and documentation, but they have to be identical to the original receipts and records. However, this does not mean that you can discard the hard copy of the tax record because IRS can always ask for the printed original document at any point.
There is no statute of limitations in place for un-filed returns or even fraudulent returns. This means the IRS can come after you whenever.
Why digitize your records
Digitalization of your tax record helps avoid any accidental loss of data for any reason. Moreover, in case if any of the paperwork fades or retain damage, you can produce the e-copy. IRS will never believe that "your dog ate the tax records."
While you digitalize your data, you can still keep a backup of all your tax records for the business. Simply use a cloud-storage or an encrypted/password-protected hard-drive.
Let the industry experts help digitize your tax records
Now you know how long to keep a tax record for business, a final tip before we end this post, i.e., "if you are in doubt whether to keep a certain record, receipt, or document, we recommend you keep it." Better safe than sorry, right? So make this a rule.
Did you know that 1099 contractors and freelancing entrepreneurs made 36 percent of the U.S. workforce in 2019? The industry experts forecast this number to grow exponentially; therefore, as a 1099 contractor, you must protect yourself against upcoming new taxation or work laws by securing your documents for easy access.
If you are a 1099 contractor without any technical knowledge of digitizing your record, you can always seek expert assistance. Keeper Tax is a great app for freelancers & independent contractors to help them save money on taxes and assist with their online bookkeeping. The expense tracker automatically scans your bank account statements for tax deductions.
Moreover, you can visit the Keeper Tax website and check their free resource section for other valuable information. From free income tax calculators to tax advice from CPAs for self-employees, you can benefit from their resources.
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At Keeper Tax, we’re on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email email@example.com if you have questions.