Not only it is legally required, proper record retention for both paper and electronic records is a financially sound practice that will save you and your business time and costs, as well as help you avoid fines and penalties.
Maintaining and retaining your business’s financial records will allow you to make informed decisions about your business’ future. The New Jersey State Society of Certified Public Accountants (NJSCPA) explains how long you should keep certain financial records:
Whether you prepare your own books or use an outside consultant, retaining your accounting systems records for the correct timeframe can be key when doing an internal audit or during an Internal Revenue Service audit. Below are examples of financial documents that must be retained for specific time frames:
Permanent Records – Balance sheets, financial statements, check registers, cash disbursements and receipt records, income tax returns, payroll tax returns, sales tax returns, profit and loss statements, journal entries, general ledgers, and investment – sales/purchases.
Seven Years – Accounts payable, accounts receivables, bank statements and reconciliations, 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’ property register, depreciation schedules, property appraisals, and plans and blueprints, must be retained permanently.
Human Resources and Payroll
Depending on your number of employees and employee turnover, human resources and payroll records can be abundant and overwhelming. However, keeping these records 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 can then 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 benefits.
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 your records can consume a massive amount of 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 an additional 25 percent of filing cabinet space.
In order to access the most used records, small business owners should keep at least the past two years of records in the office. This will allow you to easily find the information you are looking for — whether it is to compare costs and/or contracts — to make better decisions for your business.
With the sudden increase of identity theft, it is imperative that you store and dispose of your documents in accordance with both federal and state regulations. Many document management and storage companies can assist you in properly storing and purging your records. For those who are tackling record retention without the assistance of an outside company, consult your CPA for proper storage and disposal compliance.
Your Local CPA Can Help
It is important for every business to have a clear and well-documented retention and purging 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 than listed above. Based on the type of business and your business’ structure, your CPA can help you formulate a record retention program appropriate for your business. If you don’t have a CPA, you can easily locate one online using the NJSCPA’s free, online Find-A-CPA service. Just go to www.findacpa.org, and in a few clicks you can locate a highly qualified professional who can assist you.
For more information on various business and personal financial and matters, visit the NJSCPA’s public service website at www.MoneyMattersNJ.com. While visiting, you can subscribe to Your Money Matters, the NJSCPA’s free, monthly email newsletter to receive valuable personal financial planning advice throughout the year.
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