Proper record retention of both paper and electronic records is, of course, required by law, but it also is a financially sound practice that will save you and your business time and expense by avoiding the fines and penalties of a violation and by informing decisions about your business’s future. The Pennsylvania Institute of Certified Public Accountants explains how long you should keep certain financial records.
Whether you prepare your own books or use an outside consultant, retaining your accounting records for the correct timeframe can be key when doing an internal audit or an IRS-mandated audit. Below are examples of financial documents that must be retained for specific time frames:
Permanent records: Balance sheets, financial statements, check registers, cash disbursement and receipt records, income tax returns, payroll tax returns, sales tax returns, profit and loss statements, journal entries, general ledger, and investment—sales/purchases
Seven years: Accounts payable, accounts receivables, bank statements and reconciliation, vendor invoices, petty cash records, purchase orders, expense reports, and charge and cash sales slips
Four years: FICA/income tax withholdings
Three years: Bank deposit slips and budgets
Corporate records and fixed assets
All corporate records must be retained permanently, excluding internal audit records (six-year retention), contributions (seven-year retention), and accounting correspondences (five-year retention).
Also, all fixed-asset records, such as your business’s property register, depreciation schedules, property appraisals, and plans and blueprints, must be retained permanently.
Human resources and payroll
Depending on the number of employees and your employee turnover, human resources and payroll records can be abundant and overwhelming. Keeping these records, however, can help protect your business during employee disputes. Most of the human resources and payroll records must be kept while the person is employed with your company, and then can be disposed of after the outlined timeframe, which begins after termination. According to the guidelines, businesses can purge some of these records after three to seven years.
Permanent records: Retirement plan agreements and employee W-2 Forms
Ten years: Worker’s compensation benefits, employee withholding exemption certificates, and payroll records
Seven years: Attendance records, medical benefits, performance records, personnel files, payroll checks, and time reports
Five years: Safety reports, garnishments, and life insurance
Three years: Family and medical leave, and contractors (from date of contract completion)
Due to the extensive nature of employee records, consult your CPA to discuss your records and the appropriate record retention period.
Record storage and purging
Keeping records can consume a massive amount of office and storage space. Luckily, there are companies that provide safe and secure document storage and management. By using one of these services, you can reduce your office clutter and save on filing cabinet space.
To access the most-used records, small business owners should keep the past two years of records in the office at minimum. This will allow you to easily retrieve information, whether it is to compare costs and/or contracts, or to make better decisions for your business.
With the constant threat of identity theft, be sure to store and dispose of documents in accordance with both federal and state regulations. Many document management and storage companies can assist you in properly storing and purging records. For those who are tackling record retention without the assistance of an outside company, consult your CPA for proper storage and disposals compliance.
Your local CPA help
It is important for every business to have a clear and well documented retention and destruction policy. It is equally important that this policy is communicated to all personnel and equally applied. The record-retention guidelines are extremely comprehensive for small businesses, and there are many more facets for compliance. Based on the type of business and your business’s structure, your CPA can help you formulate a record- retention program appropriate for your business. To find a CPA in your area, visit www.IneedaCPA.org.
(Money Management is a weekly personal finance column prepared by the American Institute of Certified Public Accountants and reviewed and distributed by the Pennsylvania Institute of Certified Public Accountants.)