Recordkeeping isn’t fun, but keeping good records is vital. It doesn’t use the talents and skills you deploy in running your business, and it takes time and effort away from your business activities. Recordkeeping for business isn’t optional. The IRS requires you to keep books and records for your taxes, and various government agencies require records for employees. But even if it’s not fun and you have to do it, recognize that recordkeeping is a vital way to stay on top of what’s happening in your business. Additionally, good recordkeeping can translate into increased profits and less problems.
Why You Should Use Good Recordkeeping
You must keep certain records for tax purposes, but this can work to your advantage. Good records enable you to take every tax break to which you’re entitled. Without such records, you may lose out on legitimate deductions. For example, if you don’t maintain a required log—via a written record or app—with crucial information when you drive your personal vehicle for business, you can’t deduct the cost of this driving. This is true even if you want to use the IRS standard mileage rate and know how many miles you’ve driven for business. Also, you must keep certain records if you have employees—more on this further into the reading.
Good records enable you to know how your business is doing. Are you making or losing money? You may think you’re doing well because sales are rolling in, but without reference to expenses records, you may not know if you’re profitable or losing money because your costs are outstripping your revenue.
Good records also serve to help you grow your business. For example, suppose you want to expand and need to borrow money, the lender requires you to provide certain records (such as a profit and loss statement and balance sheet, both of which can be easily generated from your accounting records as discussed below). Good records will also help with forecasting to craft a new budget and plan for the future.
How To Keep Good Records
You don’t have to be a math whiz to have good records for your business activities. Today’s software, cloud, and mobile accounting solutions, such as QuickBooks, Xero, and Zoho, make it easy—and inexpensive—for you to have complete records. All you need to do is record income and expenses regularly. You receive payment for work performed: document it. You pay a bill: record it. Develop good recordkeeping habits, so you don’t overlook any entries.
Accounting records are not the only ones you need. Here’s a list of some other records you should maintain to run your business smartly and stay compliant with the law:
Employee information. If your business has employees, develop a recordkeeping system—on paper or in the cloud. Keep hiring information (e.g., job descriptions, job offers, onboarding procedures), rates of pay and salary history, performance reviews, disciplinary actions, and your employee handbook. Also, keep time cards, copies of W-2s, and Forms I-9 (showing an employee is eligible to work in the U.S.).
- The Equal Employment Opportunity Commission (EEOC) requires employers to keep employment records for one year.
- The Fair Labor Standards Act (FLSA) requires payroll records be kept for at least three years (two years for job evaluations, wage rates, and more).
- The Age Discrimination in Employment Act (ADEA) requires payroll records, including employee benefit information, to be kept for at least three years.
- These records need to be kept for at least four years for federal employment tax purposes.
With the ability to store information in the cloud, you can keep data indefinitely. State and local laws employment laws may also have recordkeeping requirements.
Tax information. Keep copies of returns and supporting documents (e.g., receipts, invoices, logs for business driving, substantiation for charitable contributions) for a minimum of three years. This is the period in which the IRS can audit you (six years if you omit more than 25% of your gross income). If you engage independent contractors to work for your business, keep copies of Form 1099-NEC showing you’ve complied with reporting requirements.
Business information. Certain business records should be kept forever. These include, for example:
- A “doing business as” (DBA) certificate if you’re a sole proprietor who’s registered a business name with your city or county.
- Partnership agreements
- Limited liability company operating agreements
- Minutes of annual board meetings if your business is incorporated
- All contracts and agreements
More ways to think about good recordkeeping:
Don’t look at recordkeeping as a tedious chore. View it instead as an opportunity to understand what’s going on in your business so you can make changes needed for growth. You can learn more about your tax records in IRS Publication 583, Starting a Business and Keeping Records
This article was written by Barbara Weltman and originally appeared on Score.