Some of us save things in shoeboxes. Others keep things in folders. Then there are the tech-savvy people who manage to save everything in digital files. This reduces the need for physical space for bulky filing systems and the possibility of losing records in a natural catastrophe. The important thing is that most people—and business owners in particular—recognize the benefit of some kind of filing system.
On the other hand, there are still people out there who think it’s a waste of time and space to save documents. We can all admit it would minimize clutter if you simply throw all those old receipts and documents into the shredder. Operating with that mindset, however, would inevitably lead to all sorts of problems for individuals and businesses alike.
There are countless reasons why it’s essential to keep good records, and there are many ways to simplify your filing system so you can keep a well-organized method, and still easily access old documents. Read on to learn the importance of record keeping, as well as some foolproof ways to get your documents in order and back up your records. After all, good record keeping translates to peace of mind.
Why should I keep records of everything in my house?
We all buy things. After all, we live in a consumerist society. Americans purchase various household items each year. Everything from food and cleaning supplies, to clothes and electronics. We also purchase big-ticket items, such as cars, homes, and property. The point is, we spend a lot of money, and even the little things can add up to a large sum of money.
So what does that have to do with the importance of records keeping? Well, think about what would happen if you would need to return something. Or, what if something should break prematurely or malfunction? Don’t you think it’s good to have a record of your purchase, kept in a safe location so you could easily go to the store and make a return or an exchange?
Keeping records of these purchases can save a lot of money for you over time. Besides needing to return or exchange something you purchased, you might need to use something you bought as collateral for something else. For example, if you’re considering using the equity on your home to take out a home equity line of credit (HELOC), you will need to use your house as collateral, so your mortgage documents need to be readily available.
Another thing to consider is the tax aspect. Many people don’t realize that certain items qualify for a tax deduction until their accountant or CPA asks for the information during those times. Besides the items you can write off (as long as you keep a record of the purchase or transaction), there are also items you absolutely must keep on file. For example, you should keep W-2s and copies of your tax returns for a minimum of seven years.
Why do I need to keep records of everything in my business?
Similar to how we run our homes, businesses deserve priority in terms of the importance of records keeping. Records not only keep your business in order but if you’re diligent about keeping good records, but you’ll also be able to identify the progress of the company and the levels of growth during the life of the business.
While there are many documents we should save at home, the items for business are more of a requirement than a suggestion.
Some documents you should be sure to keep on record for your business include:
- Business certificate
- Proof of business insurance
- Registered office address
- Rights over assets
- Articles of Association (AoA)/Articles of Memorandum
- Record of directors
- Meeting minutes
- Financial information (costs, revenues, profits)
- Current and past customer/client lists
- Receipts for business expenses
- New hire information
- Employee I-9s
- Employee W-2s
- Tax returns
This is just the tip of the iceberg where important records are concerned. The main thing to remember when considering which items to keep is that there are certain things you are legally obligated to retain (and this can vary from business to business, depending on the industry and state you work in). So, stay diligent about keeping those items stored away in an organized fashion.
The IRS’s List for Employment Tax Record Keeping
While we’ve covered what an audit is, it still seems like an overwhelming process. Luckily, the IRS, the authority for businesses in most areas, has a list of their own! The IRS states on their Employment Tax Recordkeeping page, “Keep all records of employment taxes for at least four years after filing the 4th quarter for the year. These should be available for IRS review.”
Your employment tax records should include:
- Your employer identification number (EIN)
- Amounts and dates of all wage, annuity, and pension payments
- Amounts of tips reported
- The fair market value of in-kind wages paid
- Names, addresses, social security numbers, and occupations of employees and recipients
- Any employee copies of Form W-2 that were returned to you as “undeliverable”
- Dates of employment for each employee
- Periods for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments you or third-party payers made to them
- Copies of employees’ and recipients’ income tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V)
- Dates and amounts of tax deposits you made
- Copies of returns filed
- Records of allocated tips
- Records of fringe benefits provided, including substantiation
While this seems overwhelming, if you use a payroll provider like Journey, a lot of this information will be provided to you within your Year-End Reports at the end of each year. However, you will still need to download the reports, organize, and store them accordingly. Be forewarned, this information compiled together is a lot of data. So, take a deep breath, and go down the list item by item. We’ve included links to resources, and if you have your Journey reports but don’t understand them, watch this webinar recording.
This list applies to tax documents, but there is a separate list detailing the other types of paperwork you should be keeping. The required documents can also differ based on your industry, so ensure you’re aware of any specifications. And if you don’t follow the rules laid out by the IRS? Well, that’s when everyone’s second favorite word comes in – penalty. The IRS has an abundance of resources and details available on their website, so use it! If you don’t understand the IRS’s verbiage or can’t find something, Google can be your go-to.
How can I simplify and organize my records?
Speaking of safely storing documents in an organized fashion, here are some ways to keep records of everything:
- Determine the best place to keep relevant documents, and stick with that location. Keep things consistent.
- Figure out the method that works best for you to quickly and efficiently file your documents. You might need to try a few different ways to get a feel for which process works best for you.
- Color-code your files to recognize at a glance which record belongs where.
- Take a picture of every receipt each time you receive it, and save it in a file on your smartphone. Delete the image once it is irrelevant (for example, if your item is no longer eligible for return because it’s past the return date).
- File your documents as soon as you receive them. Remember, the longer you procrastinate, the harder it’s going to be when you finally do get to it.
It’s important to remember that catastrophes do still happen. A catastrophe can include fire, flood, earthquake, tornado, hurricane, or any other destructive event not caused by nature (robbery, accidental deleting of records, etc.). The importance of records keeping goes hand-in-hand with the importance of back-ups. This means if you’re someone who keeps physical (paper) records of everything, make copies of them and put them in a safe or lockbox offsite.
If you prefer the digital method, you should always back up your files to an external hard drive, or some type of cloud storage, such as Dropbox, Google Drive, or OneDrive. It’s a good idea to set a calendar notice to remind you to back up your files periodically. If you don’t, you’ll likely forget and will only realize once something unexpected happens.
It’s also crucial to note the filing requirements for some of this paperwork. For example, the I-9 form even has its own page for proper storage and filing. Depending on the method, paper, microfilm, or electronic, there are differing requirements. You can mix and match storage techniques to cater to document needs – just keep things consistent and organized.
For the Love of Records
Whether you are the receipts-in-a-shoebox type, the hanging-file type, or the digital guru, you need to recognize the importance of records keeping for your business. You don’t have to save every single document indefinitely—certain documents only require safe-keeping for a specified amount of time (like saving tax documents for seven years).
One final thing to note: Even though you may feel that your documents are being kept safely and securely on file with a third party (bank, payroll provider, financial advisor, etc.), be sure to download and save those documents as well. Be mindful of your state’s rules as well, because as the employer, record keeping is ultimately your responsibility. If the dreaded audit comes, they’ll expect you to have everything easily accessible and on-hand. If you keep your own set of records, rest assured that one way or another, you’ll always have access to them within the audit’s deadlines.
At the end of the day, the time you spend safeguarding your records is worth the price for peace of mind.