What Financial Documents Should Be Shredded? (Free Retention Schedule Guideline)

What financial documents should be shredded? It’s not a straightforward question, as you must also be aware of retention periods. Running a business requires a firm understanding of data privacy and protecting sensitive data from harm. Failure to do so can result in massive financial penalties, loss of consumer trust, and even criminal penalties. The risk has never been higher, with all industries affected. For example, according to HIPAA, the healthcare industry suffers nearly two breaches of more than 500 patient records daily, almost doubling in the last five years. Shredding is the best way of disposing of paper-based documents, especially financial records, so what financial documents should be shredded?

Bank Records

Let’s begin with the paper-based statements you likely receive monthly in the mail… It largely depends on who you bank with and how you prefer to manage your records.

Investment Statements

Working out how long to keep documents before shredding when it comes to your investment statements is challenging… With your year-end statement, hold it until you receive the following year’s year-end statement before shredding it.

Payroll

Payroll records consist of more than just historical paystubs from your employees. Various types of payroll documents exist, including:

• Employee information
• Employment information
• Direct deposit details
• Timesheets
• Pay details
• Deductions
• Reimbursement forms

During an audit, you may be asked to produce your payroll records, but each type of record also comes with its retention period. Here’s a brief breakdown of some of the documents you must keep and when you can shred them:

• One Year – Employment records include applications, promotions, and demotions.
• Two years – Timecards, work schedules, and wage rate tables.
• Three Years – According to the Fair Labor Standards Act (FLSA), documentation relating to gender, occupation, and hourly rates must be kept for three years.
• Four Years – Payroll and paycheck records must be kept for four years, according to the IRS, which includes employment and pay dates.
• Six Years – Financial statements, 401(k) forms, and COBRA information should be kept for six years after employee separation or plan date.

Note that some states may require you to keep records for longer. For example, California requires payroll documents to be kept for four years, whereas Montana requires five years.

Proof of Property or Assets

Your business may own a building or other valuable assets. Any proof of ownership, such as a deed or a sale document, should be kept for as long as you hold that asset. In the case of many businesses, this may involve keeping documents for decades. But what documents should be shredded after you dispose of that asset? Any documents relating to asset disposal should be maintained for at least seven years. The seven-year rule on financial document shredding is recommended by experts based on the IRS’s usual audit timeframes.

Credit Card Statements and Offers

Credit card statements fall into the same realm as bank statements. You can check your statements online without needing a paper copy. However, consider holding these statements for one year anyway to be on the safe side. Credit card offers are also statements you shouldn’t forget about. These documents contain sensitive information and should be shredded when you no longer need them.

Tax Records

Hold all tax documents, including IRS returns and supporting documents, for at least seven years before shredding. The seven-year timeline is based on IRS audit timeframes. According to IRS audit guidance, the agency generally examines returns from the previous three years in an audit. However, if the IRS finds a substantial error, they can go back up to six years. Note that this is only a broad overview. If the IRS suspects something is deeply wrong, they can go back even further.

Old Checks and Checkbooks

If your business still writes and accepts paper checks, you should keep all checkbooks and registers for at least seven years. This is because checks are relevant to your taxes, making them supporting documents if the IRS decides to audit you. But how long should you keep canceled checks? Canceled checks have no long-term tax implications beyond the current year, meaning you can dispose of them after one year. Treat them like any other financial document and have them shredded.

Receipts

When asking, “What financial documents should be shredded?” you may wonder whether receipts have to be retained at all. The answer is yes. Receipts can also have tax implications, meaning you should keep them for as long as the IRS can audit you. Like checks, receipts should be kept for a minimum of seven years. However, credit card receipts are the exception. The IRS states that keeping these types of receipts isn’t mandatory but only if you have other documentation registering the transaction, such as deposit records. Should you shred receipts? Like other types of financial documentation, receipts must be shredded securely. Even a simple receipt can provide a window into your business’s financial affairs.

Profit/Loss/Accounting Reports

Your profit, loss, and accounting reports are among your business’s most sensitive documents. Reading any of these document types provides insights into your business’s financial health.   Whether referring to quarterly or annual reports, these documents must be stored securely. How long should you keep financial documents of this type? In any business audit, the IRS will look at these reports immediately, so you should keep them in your records for at least seven years, even if you also have virtual copies. However, many businesses opt to keep them permanently

Shredding Your Business Financial Documents

Figuring out what financial documents should be shredded is a constant records management challenge for businesses as fraud and identity theft rates skyrocket. Some business owners keep everything, but this can be a drag on your operations and inevitably puts you at greater risk. As a rule of thumb, anything related to your tax affairs must be kept for a minimum of seven years. Simply throwing them in the trash isn’t enough to protect your business. You need a reliable document shredding provider.