When tax time comes around, your accountant will ask for quite a bit of documentation to support your tax filing. Keeping accurate digital or physical records can make tax filing measurably faster and simpler.
When it comes to documentation, the more the better. When in doubt, hold off on throwing something out until you’re sure you don’t need it. At a minimum, you’ll want to keep all documents that could help you prove the validity of all income, credits, and deductions.
Do yourself a favor and keep a record of the following documents throughout the year.
Trying to identify your expenses several months after the transactions take place can be a headache. As you spend money, develop a process for capturing the receipt (photograph or filing), categorizing the expense, and logging it in your bookkeeping system. Organized receipts will help ensure that your taxes are filed properly and that you’ll be able to defend your books in case of an IRS audit.
Similar to receipts, your invoices are the documentation needed to prove and classify your income. Keep track of all invoices you send out and make sure that due dates, payment dates, and payment statuses are kept up-to-date.
Credit Card & Bank Statements
Luckily, most credit card and bank statements are digital. Nevertheless, make sure that you have access to all banking statements for at least three years.
Employment Taxes (w2 and 1099 forms)
Like your invoices, these forms back up how much you were paid in income. W-2’s are only used for full-time employment, while a 1099 form is often issued for freelance or contract work totaling over $600 annually.
If you have employees, you’ll need to pay payroll taxes and be able to show proof of that to the IRS in the future. Keep all payroll information for at least 3 years.
Previous Tax Returns
If the IRS notices anything odd with your filing, they will ask to see your previous returns in an audit. Once you get your return, you may be so tired of taxes that you don’t want to deal with it. But take the final step of saving it and filing it away—just in case.
If your accountant is regularly producing financial statements for you each month or an annual report, keep copies of your financial reports.
How Long Should I Keep Tax Documents?
According to the IRS, documents must be kept for at least 3 years after filing. So if you purchased something in January 2016, for example, ideally you’ll hang onto that receipt (or photograph of it) until April 2020.
The official line from the IRS is that documents should be kept “as long as needed to prove income or deductions on a tax return.” The IRS can only audit you and you can only amend your returns for 3 years after filing, so after that there’s little chance you’ll need those documents again.
If, however, you don’t file your taxes or leave out significant amounts of income, the IRS can come knocking well after the 3-year period. There is no statute of limitations for unfiled tax returns.
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Where Should I Store My Tax Documents?
You can organize your tax documents in any number of ways, ranging from a digital solution to a shoebox. What matters most is that your documents are in one location (not multiple shoeboxes around the house) and are classified in a way that lends itself to easy access.
That said, a digital solution is far superior to hard-copy filing. You don’t have to worry about losing or destroying documents. With a cloud solution, you can access them from your phone, computer, or tablet. You can organize everything neatly into folders and sort by date.
Document Storage in Quickbooks
Many small business owners will opt to use Quickbooks Online for their invoicing, making it a convenient place to also store transaction-level documentation, like receipts. Quickbooks Online is able to connect to your bank accounts so that transactions can feed to it directly. However, Quickbooks Online lacks a way to store ancillary documents, like past tax filings.
Document Storage in Google Drive
Google Drive allows you to store almost any file type and organize your information into easy-to-follow folders. The limitation here is that it doesn’t speak to your accounting file directly, meaning that there will be a few more steps involved if you need to track down an old receipt.
Document Storage in ScaleFactor
ScaleFactor lets you keep all of your important documents in one place and connects relevant documents to your accounting file. Transactions in the accounting file are automatically linked to the receipt in question, for example. On top of that, the Documents tool allows you to keep and classify additional documents, like tax returns and entity filing paperwork.
If there are two things to remember about storing documents for tax purposes, it’s the following:
- When in doubt, keep it.
- By all means necessary, try to go digital.
When tax season comes around again, you will be prepared and ready. And if by chance you ever find yourself under audit, you’ll be ready to defend your filing.