Today we’re going to answer a question that we get asked all the time, “What information do I need to save for the IRS in case of an audit, how long do I need to save it, and how should I best organize all this information?“ “Are electronic receipts ok, or does the IRS require paper receipts?” With the answer in this Numbers Divas tip, you can finally stop worrying about this issue, and concentrate on making more money in your business!
The Information records you must retain for the IRS purposes falls into three categories: Income, Expenses, and Payroll:
1.Income: the simple and fun part! Income is comprised of anything (Products or Services) that you sell in your business. This does NOT include alimony or any income from a personal account.
2.Expenses: any charges incurred by your business, such as rent for your office space, advertising, professional services, website maintenance, office supplies, cell phone, etc.
3.Payroll: Now, you are probably thinking, wait a minute, isn’t that an expense? The answer is yes, however, payroll reports detailing the employer paid taxes and gross employee payroll are necessary as well.
So how long do you need to keep this information? The IRS says seven years, but we recommend eight years, just to be safe. Now on to the big question, “How on earth do I categorize this information for seven years?” Our recommendation is that you categorize by calendar year, so every January, create folders for these three major categories:
1.Deposits or sales of services and/or products
2.Expenses or payments incurred, money paid out of your business
3.Employee payroll; this includes both W-2 employees and subcontractors (1099 employees)
Now unless you want to live in a paper nightmare world, which some of you are probably in right now, we recommend that you categorize this information into a system. We recommend QuickBooks Online because it’s simple and easy to use. You can enter the data in QuickBooks Online yourself, or hire a bookkeeper (like us!) to do that for you. The real power of QuickBooks (or any system) is the ability to analyze your income and expense in terms of your profitability, and take action on this throughout the year, instead of waiting until the end of the year, and realizing you didn’t make the money that you thought, or hoped you were making.
To stay tuned for more small biz accounting information, delivered in a FUN way and interesting way, please enter your name and email into the Money Tree bar above.
The Numbers Divas