Bookkeeping
Bookkeeping basics for small businesses: records, rules and how long to keep them
A beginner's guide to small business bookkeeping: what to record, the IRS rules on recordkeeping systems and the cash method, self-employment tax, 1099s and W-9s, and how long to keep each kind of record.
Prepared by Aldro Accounting · Updated · Sources checked
The quick answer
Bookkeeping is recording every business transaction, from the supporting documents your purchases, sales and payroll create, so you can prepare financial statements and tax returns. The IRS lets you use any recordkeeping system that clearly shows income and expenses. Keep records supporting a return for at least 3 years in most cases, and employment tax records for at least 4 years.
What bookkeeping is and why it matters
Bookkeepers are often responsible for some or all of an organization's accounts, known as the general ledger, according to the Bureau of Labor Statistics. They record transactions, post debits and credits, and produce financial statements and other reports.
The IRS says good records help you monitor the progress of your business, prepare financial statements, identify sources of income, keep track of deductible expenses and your basis in property, prepare your tax returns and support the items reported on them.
Records also carry legal weight. The IRS calls the responsibility to substantiate entries, deductions and statements on your return the burden of proof. You must be able to prove certain elements of expenses to deduct them.
Choosing a system and an accounting method
You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law doesn't require any special kind of records, though the type of business affects which records you need.
Every purchase, sale, payroll run and other transaction creates supporting documents. Those documents hold the information you record in your books.
Which accounting method a business may use depends partly on a gross receipts test. For tax years beginning in 2026, a corporation or partnership meets the section 448(c) gross receipts test if its average annual gross receipts for the prior 3 tax years don't exceed $32,000,000.
If you're self-employed: what your books feed
Sole proprietors and independent contractors generally use Schedule C to figure net earnings from self-employment. If those net earnings are $400 or more, they file Schedule SE and pay self-employment tax.
The self-employment tax rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. For 2026 the Social Security part applies to the first $184,500 of combined wages, tips and net earnings. An additional 0.9% Medicare tax applies above $200,000 for single filers, $250,000 for married filing jointly and $125,000 for married filing separately.
The employer-equivalent portion of self-employment tax is deductible when figuring adjusted gross income. Self-employed people may also have to make quarterly estimated tax payments, which can cover self-employment tax.
Paying contractors: W-9s and 1099s
Ask each U.S. payee to complete Form W-9 so you have their taxpayer identification number before you need to report payments.
For tax years beginning after 2025, the minimum threshold for reporting certain payments on information returns, and for backup withholding, rose from $600 to $2,000. It will be adjusted for inflation starting in 2027.
A business required to file 10 or more information returns in a year, counting all types together, must file them electronically. Beginning with tax year 2026, the IRS Information Returns Intake System (IRIS) is the only system for e-filing them, and its taxpayer portal is free. Filing through IRIS needs a Transmitter Control Code, which can take up to 45 days to get.
Third-party settlement organizations report payments on Form 1099-K only when payments exceed $20,000 and transactions exceed 200 in a calendar year.
A sole proprietor isn't required to have an EIN unless they have a Keogh plan or must file excise or employment tax returns.
How long to keep records
Keep records as long as they're needed to prove the income or deductions on a return, which generally means until the period of limitations for that return runs out. The IRS sets these periods:
What late books cost
Books that aren't ready lead to late returns. For an income tax return required to be filed in 2027 that is more than 60 days late, the minimum penalty is the lesser of $535 or 100% of the tax due. For partnership and S corporation returns due in 2027, the dollar amount used to figure the late-filing penalty is $260.
Late information returns and payee statements due in 2027 cost $60 each if corrected within 30 days, $130 if corrected by August 1 and $340 after that, with at least $690 for intentional disregard.
Aldro keeps the books for $20 a month, with unlimited bank and card accounts, monthly reconciliation and statements.
Worked example
Say a freelance designer earns $70,000 and has $10,000 of documented expenses in 2026. Schedule C shows net profit of $60,000. Because net earnings are over $400, Schedule SE applies. At the 15.3% rate, $60,000 x 15.3% = $9,180, and Schedule SE figures the exact amount. The employer-equivalent portion of that tax is deductible when figuring adjusted gross income. The receipts for the $10,000 of expenses should be kept for at least 3 years after the return is filed, since the designer carries the burden of proof for each deduction.
Common questions
Does the IRS require a specific bookkeeping system or software?
No. You may choose any recordkeeping system suited to your business that clearly shows income and expenses. Except in a few cases, the law doesn't require any special kind of records.
How long should I keep business records and receipts?
Generally 3 years for records supporting a return, at least 4 years for employment tax records, 6 years if you underreported income by more than 25%, 7 years for bad debt or worthless securities claims, and indefinitely if no return or a fraudulent return was filed.
When do I have to pay self-employment tax?
When net earnings from self-employment are $400 or more. The rate is 15.3%, with the 12.4% Social Security part applying to the first $184,500 for 2026.
What is the 1099 threshold for contractors in 2026?
For tax years beginning after 2025, the minimum threshold for reporting certain payments rose from $600 to $2,000, with inflation adjustments starting in 2027.
Do I need an EIN as a sole proprietor?
Not unless you have a Keogh plan or must file excise or employment tax returns.
The cheapest way to get your business taxes done: $399 flat.
Business tax filing is $399 USD a year, and it covers everything tax for that year.
How it works
- Tell us about your business. A two-minute form. No payment is collected through it.
- Get your next steps by email. We’ll email you the next steps within one business day. After you sign up we’ll send you a secure upload link for your documents.
- We file it. Our team prepares and files your return. Add bookkeeping for $20 a month if you want it.
What's included
$399 a year covers everything tax for that tax year.
- Every business return for the year. All the federal and state or provincial business returns you need for the tax year: Schedule C, 1065, 1120-S, 1120 and their state returns in the US; T2, or T1 with T2125, in Canada.
- More than one state. Multi-state returns are included at the same price.
- Your personal return. The owner’s personal return (1040 or T1) is included when it’s needed for the business income.
- Quebec. Quebec returns (CO-17, TP-1 and TP-80) are included. Our Quebec pages are in French, and our team works with you in English.
- Extensions and reminders. Extensions (Form 7004 or 4868) and quarterly estimate reminders are included.
- Information returns. 1099-NEC, T4/T4A and T5018 slips are included in the tax price.
- City and excise returns. City and local business tax returns, and state excise returns such as Washington B&O, are included in the yearly price.
- Franchise tax reports. State franchise tax reports, such as the Texas franchise tax report, are included.
- Estimated tax and instalment amounts. We work out your quarterly estimated tax payments in the US, or your CRA instalments in Canada, and tell you what to pay and when.
- Unfiled past years. Each unfiled prior-year return is $399 per tax year, the same flat price.
- Bookkeeping at $20 a month. Unlimited bank and card accounts, monthly reconciliation and monthly statements.
Basic inventory tracking for online stores, such as Shopify, is included. Full cost-of-goods reconciliation is quoted separately. Payroll processing and sales-tax filing aren’t included in bookkeeping. Prices are in USD. Our team prepares and files your return.
Sources
- BLS: Bookkeeping, accounting and auditing clerks · checked October 31, 2026
- IRS: Recordkeeping · checked October 31, 2026
- IRS: How long should I keep records? · checked October 31, 2026
- IRS: Self-employment tax · checked October 31, 2026
- IRS: Publication 1099 · checked October 31, 2026
- IRS: Revenue Procedure 2025-32 · checked October 31, 2026
This guide explains general rules from the sources listed. It isn’t tax advice for your situation.