Whether you have an overflowing pile of paperwork or have a system in place for getting rid of tax records, it’s important to know what you need to keep and how long you should save them.
Your records should include information about your income, withholding and estimated taxes, and deductions or credits claimed on your tax returns. That includes Forms W-2, 1099, and other forms from employers or vendors; canceled checks, receipts, invoices, mileage logs, and other proof of purchase or sale; and statements from bank or brokerage accounts.
Employment tax records
If you have a business with employees, then you know that you need to keep a variety of records related to employment tax matters. These include payroll records, hiring documents, pay stubs, time cards, and other forms of information related to employee wages and taxes.
Federal law says that you should keep employment tax records for at least three years after filing your return. However, there are several reasons why you may want to keep these records for longer.
For example, you may need to retain these records if your company is audited by the IRS. The agency typically conducts an audit of a business within three years after the company files its tax return. By keeping copies of these records beyond that period, you can give your company a better chance of winning the audit.
Other reasons that you may want to retain these records indefinitely are if you’re planning to sell your company or need to file a claim for a loss carryback. In these cases, you’ll need to retain these records for at least seven years after the loss is written off.
The IRS, DOL, and INS all have different requirements about how long to keep these records, so it’s important to check with your HR and tax professionals to see what specific requirements they have.
Generally, the IRS requires that you keep payroll records for at least four years after the date the tax returns are filed and paid (or the due dates for payments if they’re filed late). You should also retain these records if you omitted income from your tax return or failed to report an amount of income of more than 25% of your gross income.
A few other special circumstances require you to keep these records indefinitely, such as if you’ve ever been audited by the IRS or are claiming losses from bad debt write-offs or worthless securities. You should also keep these records if you’re seeking credit for the cost of a worthless security or debt, so you can prove that the security was purchased at a reasonable price.
Business income and expenses
If you are a business owner, you may wonder what tax records to keep and how long they should be kept. The answer is that it depends on the type of business you run and your accounting system.
The IRS encourages you to keep any documents that support the income you receive and the deductions you take. This includes receipts, invoices, and canceled checks. Keeping these records will help you prove your income and expenses to the IRS if you are audited in the future.
Generally, the IRS says that you should keep tax records for at least three years after they are due or paid, whichever comes first. However, many experts recommend keeping them for a longer period of time.
It’s also a good idea to keep any documents that are important to your business, even if they don’t apply to taxes. These documents might include your business’s licenses and permits, agreements with vendors or clients, and health and safety policies.
Another key record you should keep is your business bank statements. These statements are the primary source of information for your business books, which should show your gross revenue and other financial transactions. It is also helpful to keep supporting documentation for each transaction, such as a copy of your credit card statement or receipts.
Other important records you should keep for tax purposes are your human resources files, including employment applications, employee resumes, and performance reviews. These records should be retained for seven years after an employee leaves the business or retires, and ten years if an employee is injured on the job.
It’s also a good idea to have records of any major expenses for your business, such as travel or capital investments. This will help you keep track of your business’s cash flow and determine if you are using your business’s resources efficiently. It can also provide a clear financial record to lenders, improving your chances of securing funding.
Investment income and expenses
Investing can be fun, but it also requires tax records to prove what you earned. Keeping good investment records can simplify the process of preparing your tax return and help you make informed decisions.
The income you earn from investments can be subject to federal or state tax, depending on how it’s earned and where it’s held.
It can include dividends from stocks, interest from bonds or cash, or profits from selling investments. It can also include the interest you pay on loans used to buy an investment property or other assets.
For the most part, investment income is taxable at ordinary income rates, except for qualified dividends and municipal bond interests, which are not taxable. Expenses on investments may be deductible, though they are limited to the net investment income you receive in a given year.
In addition to records of your expenses, keep other documents that support the figures you enter on your tax return, such as canceled checks, credit card receipts, and mileage logs. If you own property, save documents such as home title and mortgage contract information, mortgage payments, and receipts of repairs or improvements.
If you own stock or other securities, keep paperwork that shows your cost basis, including purchase prices and sales prices, commissions, original issue discounts, and load charges. Likewise, records of investment accounts should show the balances at each month’s end, and statements from mutual fund companies or brokerage firms should contain commissions and distributions you’ve received, as well as dividends you’ve reinvested.
You should also keep IRA and retirement account statements, as well as checks you’ve written to pay for home improvements or other expenses. These can be useful in determining whether you can claim a capital gains deduction on your sale of an investment, and if so, the amount of any gain you might have.
As with most other records, you should keep your investment documents for as long as you own them. If you sell your stock or other investment, you will use the cost basis to reduce the taxable gain, and if you owe a capital gains tax on the sale, you’ll need these costs to calculate your cumulative net investment loss (CNIL). You should also keep records of contributions to IRAs, as well as any withdrawn funds, for at least three years after the account is closed.
Other income and expenses
There are many different records that you may need to keep for tax purposes, especially if you own a business. What you need to keep depends on your business and the type of recordkeeping system you use. However, the IRS generally recommends that you keep records that substantiate both income and expenses.
You also need to keep records relating to deductions and credits that affect multiple years. These include issues like charitable deductions, net operating loss carrybacks and carryforwards, casualty losses, and debt or investment losses. For these types of issues, you need to keep your records until they no longer apply and the statute of limitations has passed (generally three years).
The IRS has some general guidelines that can help you figure out what to keep and for how long. It is best to organize your records in a way that is easy to find and makes them accessible if the IRS asks for them.
Receipts are often the most important records to keep when it comes to proving your deductions. These include credit card receipts, invoices, mileage logs, canceled checks, and other documents that support a specific expense or deduction.
Depending on your situation, you may need to save receipts for other non-work-related expenses, too. For instance, you can deduct the cost of tools and equipment used in your business. You can also deduct unreimbursed work expenses such as professional dues, subscriptions to a professional journal or professional association, and expenses related to training and education in your field.
Other records that you may want to keep for your taxes include confirmation slips, brokerage statements, and other documents related to securities and other investments. These can show whether you purchased and sold stocks and bonds and how much you received when you did so.
You also need to keep records that document the sale of certain property, such as your home or another piece of real estate.
These documents can be helpful in calculating the number of capital gains or losses you might owe at the time of sale or disposition. You can also use these documents to support a claim for a loss from worthless securities or bad debts.