Published On January 12, 2022Setting up and running a small business successfully is no walk in the park. Beyond the day-to-day activities and other tasks required to deliver goods and services to consumers, business owners also have to contend with several other responsibilities. One of such obligations is to the IRS.
Setting up and running a small business successfully is no walk in the park. Beyond the day-to-day activities and other tasks required to deliver goods and services to consumers, business owners also have to contend with several other responsibilities. One of such obligations is to the IRS.
We're fast approaching another tax season...a typically a stressful period for business owners, freelancers and their accountants.
Preparing for the upcoming tax season requires business owners to know what type of business documents to retain and those to shred/file after the tax season. Destroying such documents helps to protect you from fraudulent activities such as identity theft and the actions of criminals looking to exploit sensitive business data. Also, having the right documents within reach can help speed up the processing and calculation of your tax returns.
To help you prepare for the upcoming tax season, let's take a look at the important documents you need to retain and those you need to destroy.
For efficient filing of tax records, small business owners should compile all necessary financial documents and file them in easy-to-access directories. Doing this right from the beginning of the business year can help smooth the process of preparing your tax returns when the time comes. Before the tax season, these documents should be readily available:
The trial balance sheet:
this is a document that shows the financial position of the business at a particular date. It’s a worksheet comprising a compiled ledger of the debit and credit account columns. Your trial balance sheet is an invaluable document that should not be shredded or destroyed.
This is a statement of accounts that reveals the financial performance of a business over an accounting period. Small businesses operators should pay particular attention to this document...it's an important document that the IRS uses to ascertain the taxable income of your business. It is also known as the profit and loss statement and its key focus is on the revenue and expenses of the business. This document should be filed and stored because it is relevant to the tax preparation process.
this is a record showing your annual payment to permanent, temporary, contract hires and freelancers that work for you and your business. It includes the total hours worked, hourly or project pay rate, and personal income tax deduction. They are usually retained for a minimum period of 3 years and are an important record that helps business owners make key decisions. It's used as proof for payroll calculations and defense in case of an Internal Revenue Service audit.
Tax return of the previous year:
The IRS recommends that tax return documents are kept for at least 3 years. If there are errors contained in a tax return, an amended return should be sent in to report and correct the inconsistency.
Tax record retention and management
The Internal Revenue Services (IRS) of the United States have provided guidelines to retain records of financial documents and tax information. Below is the record retention timeline they proffer:
- Preserve records of your original tax filing for 3 years from the date you filed and 2 years from the date you paid the tax.
- In an event you file a claim for a loss in securities investment or bad debt investment, keep records for 7 years.
- Keep employment tax record/payroll record for a minimum period of 4 years after the taxes have been paid or due.
- If you failed to report your income/ underreported your income and it is above one-quarter of the gross income filled on your returns, preserve the record for 6 years.
Shredding/Destroying Tax Documents:
Generally speaking, you should keep all relevant business and tax related documents for as long as you possibly can. However, periodically shredding sensitive files containing business and client data can help you to stay safe from criminals and fraudsters. If your business data falls into the wrong hands, it could be used to damage your reputation by defrauding clients and suppliers. It's best to protect your interests by immediately shredding all business documents once they've exceeded their usefulness. Many document shredding companies will come to your office, pick up your documents, and securely destroy your documents- without you having to lift a finger.
Digitizing your tax form and documents:
Creating a digital copy of your tax documents helps to keep your files organized and makes them easily accessible. To do this, scan and transfer all files to an encrypted electronic storage device or the cloud. Many document storage companies offer digitizing services as an add on service as well. This is most beneficial when you have bulk documents to scan.
Storing your tax documents:
You can keep your tax and other financial documents safe by moving them to a third party document storage company. Such companies typically guarantee the safety of these documents and provide round-the-clock access for easy retrieval.
Knowing how to handle and manage your business’s tax documents is important.
Keeping the right documents can help speed up the process of preparing your tax returns. Generally, you should retain all financial and tax related documents for the length of time prescribed by the IRS. We recommend storing these documents outside of your office/home through a verified document storage company. This provides the highest level of security for your small business, gives you access to your documents (digitally and physically), and allows you to destroy your documents as needed.
If you are looking to store your businesses tax documents, we are here to help. Check out our storage plans. Our team of document storage experts are here to help as well.