Which Records to Keep, Just in Case
Question: Now that my 2005 corporate tax return has been filed, I’m wondering what records I should hang on to and for how long. Can you provide some guidance?
Answer: Small businesses should err on the side of caution and keep as much supporting documentation on file as possible in case of an audit by the Internal Revenue Service, said Juliet Der Avanessian, a tax manager with Beverly Hills accounting firm Rothstein Kass (www.rkco.com).
“During fiscal year 2005, audits of small businesses organized as corporations increased after years of decline,” Der Avanessian said. Citing IRS data, she noted that the agency completed more than 17,800 audits for that period, more than double the 7,300 of the year before.
Individual returns audited in 2005 also increased, up 20% to 1.21 million, she said. She recommends that individuals maintain records related to tax returns, such as medical bills, year-end brokerage statements and 1099s, for at least six years after filing.
Likewise, you should hold on to Schedule K-1s from partnerships or so-called S corporations for at least six years. Keep records of financial transactions such as bank statements, checks, bank reconciliation statements, inventory and sales records and purchase journals for at least seven years, Der Avanessian recommends.
Business records that should be kept indefinitely include capital stock records, corporate records and minutes, tax returns and audited reports. When it comes to employee records, she said, you should hold timecards and time sheets for at least two years, payroll records for three years and wage payments, W-4 forms and records of fringe benefits paid for at least four years.
When you are ready to discard financial records older than the recommended limits, use a shredder rather than toss papers into a dumpster. And before discarding specific records that you are unsure about, check with your accountant, Der Avanessian said. You can find more information about record keeping at www.irs.gov/newsroom/article/0id10511100.html.
Hiring Your Child Can Have Advantages
Q: I have a small publishing company with no employees. However, lately I’ve needed some part-time help and wondered about hiring our college student son. What are the tax and employment rules for hiring a relative for occasional work?
A: Hiring your kids can be a solution to the lack of qualified workers in today’s marketplace. It also can be an effective income-shifting strategy between parents and children.
Most likely the wages you pay your son will be taxed at a lower rate than your income, or they may escape tax altogether if they are within the standard deduction of $5,150 for 2006, said Bradford Hall, a certified public accountant and managing director of Irvine firm Hall & Co. (www.hallcpas.com).
“Be aware that the wages paid to your son need to be reasonable for the work being performed,” he said. “Reasonable wages are determined based on the following common factors: type of work to be performed, hours of services rendered and market rates.”
Additionally, he said, you should maintain all records, including timesheets, showing that your son performed the services.
A major benefit of hiring your children is that given the right conditions, your company can realize huge savings on payroll taxes. Whether you’ll be subject to payroll taxes depends on your son’s age and your company’s business structure.
If your son is younger than 18 and your company is a sole proprietorship, partnership or limited-liability company that you, your wife or you both own 100%, then the wages would be exempt from payroll taxes, Hall said.
But if the business is incorporated or you or your wife do not own 100% of the partnership or LLC, or your son is 18 or older, the company must withhold payroll taxes on wages paid, Hall said. In addition, you would have to pay the employer portion of the payroll taxes and federal and state unemployment insurance.
Social Security and Medicare withholding adds up to 7.65%. An employer must match that amount for a total cost of 15.3%.
If it makes sense for you to hire your son, you can have him contribute to an individual retirement account and may be able to put away as much as $4,000 as an additional deduction for him. “This contribution is limited to the amount of earned income,” Hall noted, “but between the standard deduction and an IRA contribution, your son, no matter his age, can earn up to $9,150 in 2006 without having any income tax liability.”
Have a question about running or starting a small enterprise? E-mail it to karen.e.klein @latimes.com or mail it to In Box, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012.
