Hey all! I’ve lived with as little paper as possible since about 2019 because paper is awful. I hate it. I don’t know if you’ve ever had complicated taxes, but taxes seem to be a common excuse for keeping insane amounts of paper. It’s not necessary to keep the paper. It’s not. Below is my digital tax document process.
I keep four years printed, mostly just because it was printed off for me. Usually, everything is kept on my computer and backed up to the mirror drive and cloud.
The most important thing to remember about paper is that you have it to mitigate risks. By knowing what risk you want to mitigate, you can more clearly define what you need to have. So, today we’re talking about taxes because tax season is wrapping up. The largest impact risk is imprisonment for some level of tax fraud, Al Capone style. However, this is not a likely risk for most of us. The reality is that most of us make honest, stupid mistakes, such as forgetting to include online purchases or counting all the miles we put on our car as a deduction. The greatest risk here is fines commiserate with what you falsely gained from the fraud and interest.
If you take the standard deduction and only get paid through W2s, your risk is even lower. Know this going in.
For those of you who run a small business, this group gets audited the most due to all the deductions you can apply and the limitations to applying them in combination with the limited specified education of those filing the taxes. There are limitations on all of the deductions, and they aren’t always clear, so this is why you might have made a mistake. You want to be able to explain in an audit what the item was and how it applied to the category. Some risks you can’t undo. If you applied all your personal car miles as a deduction, you will most likely have to pay them all back unless you kept a log and can accurately prove what you should have done in the first place. However, if you could have done it right back then, you likely would have.
Electronic vs Paper:
Copies have been accepted for quite some time. For a decade or two, banks have been scanning in check images. These have been acceptable. Receipts have been allowed to be scanned in full for quite some time, especially considering they fade over time regardless. It’s really good practice to keep everything electronically. Now, with search features, the electronic files are likely to yield answers quicker than shuffling through papers.
The one category of documents that isn’t so easily scanned are those with physical signatures, such as contracts, wills, etc. These documents are usually not required for taxes, but copies could be requested. With the IRS, typically, copies will suffice. However, you may be taken to court over a contract, and that is a very different situation. In this post, we’re focused only on the risks associated with an audit, not on legal matters of court. The IRS does not want to be responsible for your originals.
What Documents Do I Need to Keep?
The documents you need to keep will be based on all the “itemized” things you declared on your taxes. It will also include any official tax forms sent to you, such as 1099s, W2s, Schedule Ks, and many more. The official tax forms are the easiest.
If you are proving payment from customers, you will need a link to the payer and the services or goods they purchased, as well as any taxes that were applied. You can prove this in many ways, but it’s useful to have a few angles at the same information. If you use a POS system, they track individual expenses, additionally, your bank account shows deposits. Both of these documents show income. Only one shows what it was for, but both will show the to/from part.
For deductions, you’ll need to prove how you came up with percentage usages for a home office or cell phone, as well as usage of your car. These can include room sq-ft as well as mileage logs. I keep a physical yearly calendar book and record odometer readings and locations in there. I also transfer that information (abbreviated) into a spreadsheet. The spreadsheet should suffice, except I abbreviate it so I also scan in the book. For the room, I utilize the home assessment document and room size, handwritten on there with the calculated percentage.
The utility bills might be required, IF you have more than one property’s bills, you will need to be able to show which account is being used. Otherwise, bank statements should be enough (or you can contact the utility service for historical information if audited).
There are advertising, marketing expenses, licensing fees, insurance, and more. The general guide here is to make sure you can prove what the bill is for. So you might need some itemized receipts as well as a curriculum for education so you can prove it’s related and meets that requirement. State and Local licensing is usually pretty clear.
Non-Business Deductions
Automobile registration is also something you submit, so keep that dollar amount and date document. Education, Roth Contributions, and medical expenses could all come into play. You might keep them until you do taxes just in case, but if you don’t use them on your taxes, go ahead and shred them after you file. However, none of these have to be kept physical. You can scan all that in after you file your taxes and use them.
You might get some special state and federal benefit programs, and it’s good practice to keep the paperwork that shows how much you received throughout the year. Some things you pay taxes on and others you won’t, but it’s often required to report it, such as marketplace healthcare plans and unemployment.
You might also be deducting for dependents and childcare, so you will need to be able to link your total childcare expenses to each child.
How I document Tax Records:
I keep my Taxes all together, separated by year with only the latest seven out. I have an Older folder for ones that are less likely to get pulled. Inside each folder is another folder called “Support Docs” and right next to it is the actual tax filed documents, including federal, state, and estimated tax forms.
For most of my years with standard jobs and even contracting, I just have one file called Support Docs and they are all scanned together. After starting my business, it’s now a folder.
1. Tax Checklist
For each year, I like to print out a checklist. Ramsey Solutions had a nice Self-Employed Tax Checklist that helped me think of things I’d forgotten about. I used this to prepare before doing taxes, and I checked it off and kept notes on it. That helps me figure out what types of proof I need to keep. I don’t use most of those documents to prep. Instead, I use a summary of my bank account for filing and then have to look a few things up specifically. Regardless, the checklist is a great way to remember things you’ll need to keep.
My bank transaction spreadsheet is the primary place to show what I listed the transactions as, and then there would be a document to back that up, such as a check, a receipt, or an invoice.
2. Income
I also print to PDF year-end reports from my POS systems. There are also online invoices on Amazon and The Container Store that I can save for customer supplies.
3. Expenses
I scan physical receipts from Target, Staples, etc. Then, save them into one document for office supplies or customer supplies as they apply.
- I scan my property tax statement plus the assessment for that year with my office space defined within it for that percentage.
- I use RocketBook to quickly scan the mileage log, and I use a scanner to scan in the actual physical check images since my bank doesn’t print those on my statement unless I mail them in to them. The direct deposit online method gets transferred into a slip that does not include who paid me or any of the memos from the check or a check number.
4. Backup
All of the business documents started and stay on the computer and are backed up on OneDrive as well. I mirror the entire computer drive onto an external drive and have important docs backed up to OneDrive.