IRS Record Keeping Rules: What Contractors Need to Know Now

Record keeping might not be the most exciting topic, especially in the world of construction. For business owners and administration, however, it is an important function. Not only are there legal requirements to consider, but failing to keep adequate records can lead to compliance actions and fines. For instance, a construction company inaccurately classified workers and was found in violation of prevailing wage law. Additionally, they were fined $8,000 for failing to maintain adequate employee records.

This case demonstrates the value of understanding your record keeping responsibilities and having strong policies and processes in place. Apart from exceptional cases like this, having detailed records also gives your company protection should you be audited or face legal action.

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IRS Rules on Record-Keeping

You will find a lot of advice on this topic in general, but surprisingly the IRS does not offer a lot of guidance about how long you should keep records. The most specific advice they give applies to tax-related records, for which they state:  

“The length of time you should keep a document depends on the action, expense, or event which the document records. Generally, you must keep your records that support an item of income, deduction, or credit shown on your tax return until the period of limitations for that tax return runs out.”  (Source)

This generalized advice includes employee tax records but can also apply to any document related to business operations. It is generally advised that you keep most of your documents for at least seven years.  There are exceptions, for instance, if you have employee records related to a workers’ comp claim, those should be retained for longer.

Types of Business for Record Keeping

Here are some of the types of business records you may generate during the normal course of business and recommendations on how long you should store them:

• Current employee files: These should be kept for around seven years. If an employee was injured on the job,  you should keep those records for around 10 years after the claim was resolved.  You should keep job applicant documents for at least three years, even if you did not hire the applicant.
• Accounting Documents: You should keep these types of documents for at least seven years, including financial statements, profit and loss statements, and general ledgers.
• Payroll tax records: You should keep these, including time sheets, wages, pension payments, tax deposits, benefits, and tip information, for a minimum of four years after due or after they were paid out, whichever is the later date.   
• Business Tax Returns: You should keep these, and any supporting records until you’ve passed the time allowed by law for an audit. Most of the time, the IRS can audit you for three years after filing. If they suspect a substantial error, however, they can go back six years.
• Ownership Records:  You should keep these types of records indefinitely. This includes property deeds, stock ledgers, and business-formation-related documents.
• Accounting Documents: You should keep these types of documents for at least seven years, including financial statements, profit and loss statements, and general ledgers.
• Operational Records, including bank account statements, credit card statements, canceled checks, cash receipts, and checkbook stubs, all follow the seven-year rule.

These are just recommendations; you may want to retain your records longer. Just make sure you have a policy in place to keep your records secure for the duration and for deletion and disposal.

Prevailing Wage Record Keeping

Construction companies that do prevailing wage work have some additional requirements to consider in terms of record keeping as well. Under Davis-Bacon and Related Acts, contractors, and subcontractors working on prevailing wage projects have to keep payroll and basic records on laborers and mechanics covered under DBRA for three years after the project is completed.

This includes some standard employee records under the Fair Labor Standards Act, along with additional records specific to prevailing wage laws. This includes:

• Name, address, and social security number of each worker
• Each worker’s work classifications
• Hourly rates of pay, including rates of contributions or costs anticipated for fringe benefits or their cash equivalents
• Daily and weekly numbers of hours worked
• Deductions made
• Actual wages paid
• Detailed information regarding all fringe benefit plans and programs, including records that show that the plan or program has been communicated in writing to the laborers and mechanics affected
• If applicable, detailed information regarding approved apprenticeship or trainee programs
  (Source)

Record Keeping – Protecting Stored Data

As a company, you’re responsible for record keeping. Physically keeping records in your files. This also means you have an obligation to keep the information secure.  This is especially important due to the sensitive nature of employee records. For smaller businesses without dedicated IT staff, it can be a real challenge.

The Federal Trade Commission (FTC) offers some tips on keeping sensitive employee information safe.

1. TAKE STOCK. Know what personal information you have in your files and on your computers.
2. SCALE DOWN. Keep only what you need for your business.
3. LOCK IT. Protect the information that you keep.
4. PITCH IT. Properly dispose of what you no longer need.
5. PLAN AHEAD. Create a plan to respond to security incidents.

You can read more about each step, along with tips on how to implement a data security plan, by visiting the FTC’s guide on protecting personal information for business.

The material presented here is educational in nature and is not intended to be, nor should be relied upon, as legal or financial advice. Please consult with an attorney or financial professional for advice.