Small business: Legalities - The records to keep

Small Business Basics Your transactions and book entries need to be backed up by sales slips, invoices, receipts and canceled checks. If the IRS audits your business, you may have to show evidence of claims on your business tax return. Supporting documents should be organized and easy to find. For example, you may want to store them by year and catalog them as income or expenses.

General documents
Here are some of the documents the IRS expects you to have on file:

Gross receipts -- Show the amount and sources of income with register tapes, bank deposit slips, invoices, receipt books, credit card slips
Purchases -- To document items you buy and resell, including parts and raw materials, keep canceled checks, cash register tape receipts, credit card sales slips, invoices
Expenses -- Track the cost of running the business through canceled checks, cash register tapes, account statements, credit card sales slips, invoices, petty cash slips for small cash payments.
Assets -- Maintain records on property you buy, sell or improve that is used by the business by keeping purchase and sales invoices, canceled checks, real estate closing statements.

- advertisement -

Get an EIN
Businesses larger than one person must establish an Employer Identification Number. EINs are used by the IRS to record the tax accounts. If you don't need an EIN, you must use your Social Security number.

You need an EIN if any of the following pertains to you:

Have employees.
Have a Keogh retirement plan.
Operate as a corporation or partnership.
File returns for employment taxes, excise taxes, or alcohol, tobacco or firearms taxes.

Include your taxpayer identification number -- your SSN or EIN -- on all returns and documents you send to the IRS or you may face penalties. You can obtain an EIN by filling out Form SS-4, Application for Employer Identification Number. Order the form from the IRS at 1-800-829-3676.

If you have employees, you must get a Social Security number from each one. When you make payments to an outside source, you must get the source's SSN or EIN.

Employee records
If you are an employer, you are also expected to keep records identifying each employee, as well as the hours worked and the wages earned. You will need:

Employee's full name and Social Security number
Address, with ZIP code
Birth date, if under 19
Sex and occupation
Time and day of week when employee's work week begins
Total daily and weekly hours
Basis on which employee's wages are paid, e.g., hourly, by the job
Regular hourly pay rate
Total daily or weekly straight-time and overtime earnings
All additions to or deductions from wages
Total wages each pay period
Date of payment and the pay period covered

How long to keep records
Most records should be kept at least until the IRS period of limitations has run out. For tax purposes, the IRS requires that all employee records should be held for at least four years. You may need to keep records longer for non-tax purposes, such as insurance or financing, so check with the appropriate institution.