As a business owner or a manager, you probably have storage to keep various documents, such as employee records, timesheets, invoices and bills, tax returns, or bank statements.
With all those papers piling up, year after year, one can’t help but wonder - how long to keep business records?
Unfortunately, there isn’t a hard-and-fast retention rule that would apply to all kinds of records. It would be best to determine what types of documents you have stored, categorize them, and make a retention policy.
Below, we’ll review the legal retention requirements for the most common business records and discuss best practices. To fully understand how long to keep business records, let us start with the basics and move from there.
What Is a Business Record?
Business records are documents we use to register and keep information from various business affairs and operations. It is a broad term referring to multiple files, such as employee records, bank statements, VAT records, invoices, receipts for stock or goods, or bank slips.
There are two main types of business documents:
- Active. These are the documents that we use regularly. For example, employee timecards or mileage logs used for reimbursement are active business records for the next pay period.
- Inactive. Business recordings are considered inactive when we do not need to access them regularly. Such are legal or financial records that we keep for historical purposes. We keep them so that we can access them if and when it is necessary.
These documents may come in physical form, such as copies of records stored across multiple document libraries or filing cabinets.
Still, many companies nowadays choose to stop papers endlessly piling up and opt for more efficient, digital data. Besides safekeeping important data digitally, some software solutions can also help companies make their business operations more efficient. They can automate tasks to collect relevant data.
For example, Timeero helps companies collect and store digital data for managing the mobile workforce. With several clicks, a company can have timely and accurate information on their employee attendance and traveled miles.
At the same time, using Timeero, businesses can automate their payroll and mileage reimbursement and ensure that their field employees are paid fairly. As the app stores data according to regulations, companies also have all the data they need to verify their calculations in the case of an audit or an employee lawsuit.
Why Should I Keep Business Records?
Besides knowing how long to keep business records, you should also be aware of their purpose. There are three main reasons for keeping your business records.
First, you may need them in the case of auditing your business – which can happen with no cited reason and at any time.
Secondly, keeping track of your records is a good business practice. With all crucial documents archived and data tracked, you will make your plans and set your goals much easier.
Thirdly, carefully kept records could protect you and your business should any problems arise, whether around yourself, your employees, or your clients.
What Are the Most Common Categories of Business Records?
To understand our main question better - how long to keep business records, we should first understand the difference among the most common categories of business records. These categories also help us quickly manage and access documents when we need them. Below, you will find some main types of business records.
Legal documents make a significant and essential part of your business recordings, and they vary from one business to another. For example, founding documents are proof that you own your company. They include files such as articles of incorporation of formation, partnership agreements, certificates, etc.
Besides them, your legal documents will also include:
- various business agreements,
- annual reports,
- leases, indemnity agreements,
- real estate records,
- patent, trademarks, copyrights, etc.
Tax Returns and Other Accounting Documents
Accounting records verify your business transactions. They include data about your payments, revenue, and equity.
Businesses need to keep accounting documentation for several reasons. The first reason is tax-related, as the U.S. government requires organizations to track business expenses and income for taxes. But even after you’ve filed your tax reports, you need to keep the records, as they will help you verify that you have reported your tax.
Another reason is that you can use these documents to estimate and evaluate your profits over time. This way, you will be able to plan your business activities and determine if you have enough funds to achieve your business goals and cover particular costs.
Bank statements are logs of your accounts with banks. They include records of credit card transactions, checking, savings, and investments. Businesses keep those documents to match them with their accounting records and confirm their expenses and income are correct. They can quickly notice errors if they are incorrect by comparing both record types. Businesses also need bank statements for tax filing purposes.
Licenses and Permits
Some organizations need licenses and permits to conduct their business or specific business operations. For example, you will need a food handler’s permit, a building health permit, and a liquor license if you own a restaurant. While in most cases, you need those permits archived in your database, in some instances, you need to post them in visible areas. You should always keep your licenses and permits up to date and comply with relevant laws.
These records should contain all relevant employee information, such as recruiting documents, employee contract, disability record, payroll records, correspondence with HR, employee performance reviews, any disciplinary actions under the employee attendance policy, etc.
If you need to claim your insurance, you must prove that you are covered. Insurance records contain vital information about your insurance coverage that can protect your business or provide you with a refund for certain damages. You may have general business liability insurance or insurance for different aspects of your company, such as auto insurance or renter’s insurance.
Certain industries, however, have specific requirements when it comes to documenting their practices and record-keeping. For example, home health agencies need to use Electronic Visit Verification to comply with Medicaid-funded home healthcare visits. Therefore, before creating your record retention policy, you should check all the relevant regulations that might apply to your industry.
How Long To Keep Business Records?
When it comes to the retention of business documents, companies most commonly encounter four legal situations:
- Specific Requirement Stated. Many federal and state requirements define a particular period for keeping records. When working on their business record schedules, businesses need to thoroughly consider the scope of the laws or regulations, their applicability, and the specific documents they affect.
- No Retention Period Defined. A large number of regulations and laws contain the phrase “the following records shall be maintained . . .” However, they often do not provide enough information for companies to determine how long to keep business records. Out of fear, many companies choose to keep them permanently.
- No Records Maintenance or Retention Requirements. Laws or regulations do not indicate certain records. In such situations, businesses can feel uncomfortable and establish long-term retention periods.
- Limitations of Action. Although these are not retention requirements, limitations of action represent the period when a business may be involved in legal action as an accuser or defendant. In such situations, documents may be helpful in a lawsuit or litigation.
Uniform Preservation of Private Business Records Act sets a standard of three years for archiving documents unless no other retention period is defined. Under this law, the destruction of files with a specific retention period does not constitute an offense. However, destroying files in less than three years may pose risks to the business.
Several states have adopted this Act, including Georgia, Colorado, Maryland, Illinois, New Hampshire, Oklahoma, Texas, and North Dakota.
Besides legal requirements on how long to keep business records, you must also consider tax/audit, operational, and historical requirements.
How Long To Keep Legal Records?
Founding documents are permanent company records. Therefore, you should store founding legal files as long as your business is active and the reasonable period after if any problems arise.
You should keep other administrative and legal records, such as contracts, licenses, etc.. At the same time, they are in force and longer for a reasonable time.
However, it would be best to consider the defined statute of limitations for specific legal challenges and disputes. These legal deadlines are often different from one state to another. For instance, legal deadlines can vary from three to 15 years by the state regarding the breach of contracts.
How Long To Keep Tax Returns And Other Financial Documents?
IRS and various state and federal laws and agencies demand businesses to keep the following tax records:
- You should keep business tax returns and all the supporting files for at least three years—the same stands for the sales tax registrations and returns.
- Receipts, invoices, financial statements, and bank statements should also be kept for three years.
- State and federal laws require that businesses retain payroll tax records for four to seven years.
- Businesses should keep the loan records, at least while it is active.
- Business asset documents, such as deeds, purchase records, ownership documents, etc., should be kept at least for the asset’s life.
- Other financial documents, such as financial statements, bonds, and ledgers, should be kept permanently.
- If you didn’t file the return or file a fraudulent return, you should keep the records indefinitely.
How Long Should You Keep Your Tax Records In Case of an Audit?
You should keep business tax returns and all related documents until the IRS can no longer audit your tax return. This period is most often three years after a filing.
However, if the IRS suspects a major tax violation, it can investigate as far back as six years. Therefore, you may want to play it safe to protect your business and keep all tax records and related documents for at least six years.
How Long To Keep Bank Statements?
Businesses should keep operational records - bank statements, credit card statements, cash receipts, and canceled checks for seven years if they have no other tax or business purposes.
How Long Should You Keep Insurance Records, Licenses, And Permits?
If you’re wondering how long to keep business records such as permits, insurance, or licenses, ensure to keep these documents at least until you’ve received replacements for expired ones. It is advisable to keep them for a reasonable period if any complications occur.
How Long To Keep Employee Records?
Federal laws demand businesses to keep employee records for different minimum periods. In addition, the record-keeping provisions extend when an employee files a complaint against the company.
The minimum time for keeping employee records are:
- Under the Americans with Disabilities Act and the 1964 Civil Rights Act, businesses with 15 or more employees should keep employee records for at least one year after a worker has left the company,
- The Age Discrimination in Employment Act requires employers with 20 or more employees to keep personnel records for one year.
- When it comes to lawsuit claims, most states have a two-year statute of limitations. If such a claim happens, it would be helpful to have records around.
- The IRS recommends that you retain payroll records until the employee and the businesses can no longer file amendments for that tax year.
- The Fair Labour Standards Act requires companies to keep payroll records “for at least three years.” The Act mandates that the records have specific identifying information about the staff and accurate data about the hours and the salaries. Under this law, companies should keep documents on which payment calculations are based for two years, for example, time cards, timesheets, schedules, and records of deductions from and additions to wages.
- The Family Medical Leave Act controls the medical paperwork employers must keep. Suppose an employee leaves the company for a medical reason regulated by this Act. In that case, a company must keep the records for at least three years after they go.
- When it comes to employee tax records, the IRS guidelines say to keep the records for four years after the task is due or you pay the tax, whichever of the two is later.
- For auditing, you should keep the records for seven years.
To ensure compliance, you should also consider the state’s requirements. For example, employee records must be kept in California for at least four years, according to California’s Government Code section 12946.
In the Golden State, retaining records includes documenting employee meal breaks, as California Break laws mandate employers to track and record the employee’s mandatory breaks.
The general rule is to keep employee records for at least seven years after an employee leaves the company, is terminated, or retires. However, in the case of a lawsuit or work-related accident, it’s good to keep the records for up to 10 years after resolution.
Timeero, a mobile workforce management solution, stores all the relevant data related to attendance, payroll, mileage reimbursement, and schedules for four years. As data is free of human error, you can rest assured both your business and your employees are protected in this area.
So, How Long Do We Have To Keep Business Records?
With no steadfast rule on retention, you can follow the mentioned regulations and good practices to keep your business compliant and protected.
But instead of focusing your energy on how long to keep business records, we suggest a more proactive approach.
Try searching for a solution to make the entire process of collecting and storing relevant data more reliable, accurate, and efficient.
Timeero will track, collect and store data to ensure each workday is well-documented, the staff is properly paid, and the IRS is satisfied. What more could you ask for?