Do you want to learn more about payroll record retention? If you are a US-based retailer, it is already hard enough to manage high turnover and the challenges of running payroll for hourly or minimum wage workers. But when it comes to federal, state, and local laws on records retention to comply with them as an employer, things can get complicated fast.
Payroll Record Retention for Payroll Taxes
Also known as employment taxes, payroll taxes include income tax, unemployment insurance, FICA taxes, Social Security and Medicare, and local payroll taxes.
IRS recordkeeping requirements for payroll taxes
How long to keep payroll records? The IRS says that employers must keep records of payroll taxes for at least four years, and ideally, this is long enough to cover the period in which an employee could file a change.
Payroll tax records an employer must retain include the following:
- Employer identification number
- Employer tax forms and payment receipts
- IRS notifications regarding payroll taxes
- Amounts of tips reported for businesses
- Dates and amounts of taxable wage, annuity, and pension payments
- Employee information such as addresses, social security numbers, occupations, dates of employment, and tax documents
Local and state recordkeeping requirements for payroll taxes
There are varying state and federal government laws, but there is no one standard.
To avoid legal issues, make sure to keep your payroll records for at least six years. Small Business Administration (SBA) recommends keeping records as long as possible, and Nolo suggests a record retention period of up to seven years.
Payroll Record Retention for Labor Laws
You need to keep accurate payroll records to show that you comply with all federal, state, and local employment standards. State and municipal authorities also have specific labor practices that must be followed regarding wages. For example, the Fair Labor Standards Act (FLSA) covers minimum wage laws and overtime regulations.
The Department of Labor outlines its records for non-exempt employees in the document FLSA Fact Sheet #21. This guide states that employers must keep the following documents
- Every employee’s full name, social security number, and address
- Sex and occupation
- When and on what day of the week does an employee’s workweek begin?
- Total number of hours worked
- Payment agreement / status
- Rate of pay
- Total daily / weekly regular and overtime earnings
- Payroll additions and deductions
- Real wages paid every pay period
- Date of payment and pay period
How long must you secure payroll records under the FLSA?
The FLSA mandates that payroll records be kept for at least three years, but the law only requires time cards or rate tables to last two.
Local and state labor law recordkeeping requirements
Different shapes and cities have various payroll tax regulations, so it’s best to check the payroll record retention requirements for your business.
Other labor laws that affect payroll record retention
Keep the following:
- Form I-9s at least three years
- OSHA documentation at least five years (businesses with more than ten employees)
- Retirement plan records at least six years
- Items related to ADA for at least one year (companies with more than 15 employees)
- Proof of equal opportunity employment practices and family medical leave records up to 3 years
These are federal requirements. Other state and local laws may also apply.
Payroll Records which Contain Tax and Labor Law Information
Payroll taxes and labor laws are connected, which is why the leading tax and compliance documents below contain information that applies to both.
W-4s (Employee’s Withholding Allowance Certificate)
When you hire someone, they will fill out the W-4 form with their name and address. They also provide a social security number (SSN) and tax allowances.
W-2s (Employee’s Wage and Tax Statement)
Employers must fill out W-2s for all employees to provide the IRS with crucial information about each employee. The form includes identifying information and any withholdings and income tax payments that were made on behalf of the individual.
Form 941 (Employer’s Quarterly Tax Form)
Every quarter, employers must complete the quarterly federal payroll tax return. This form includes all withheld employee taxes and employer contributions. The information also includes tipped wages.
Form 940 (Employer’s Annual Federal Unemployment Tax Return)
When employers submit their annual tax returns, they indicate how much federal unemployment taxes were paid.
Wage detail reports
Employers submit quarterly reports to the state unemployment and other tax authorities.
New hire reports
The employer submits new hire reports at a state level within a set number of days after hiring an employee.
The FLSA only requires employers to keep records of wages, but it does not need pay stubs. However, 26 states require employers to issue pay stubs.
Business Processes That Generate Payroll Records
When you’re paying your employees, a spreadsheet or payroll software will ask for the pay rate and the number of hours worked. Once these are entered into the system, reports can be generated to see how much was paid over specific periods.
When hiring, offer letters and onboarding items contain employment information such as job title and compensation.
Frequently Asked Questions
What will happen if you don’t keep payroll tax records?
The consequences of not maintaining records are devastating. You could be audited and lose everything, or worse yet – fined heavily for your negligence.
Payroll is the responsibility of employers, even if they have a lot of help with payroll management software. In extreme cases, where there has been some issue related to taxes or compliance, IRS agents will seize assets from the employer’s bank account as well as criminal press charges.
Paper or digital records?
This is a tricky one. The FLSA does not specify which format to use, but it’s recommended that you keep records in an electronic form because paper or plastic can be lost and will take up more space.
But as the world becomes more digital, attaching a document and sending it has its benefits.
What are my responsibilities for protecting private employee and business information?
When it comes to payroll records, the FTC recommends that you take precautions. These can be found in their Business Guide for Protecting Personal Information.
Where to learn more about tax and labor laws?
Small business payroll provider Wagepoint has created an interactive map that provides state-by-state tax information and labor law and a guide on US taxes with infographics. The resources are available for free to anyone wanting more insight into these topics.
Government websites and advocacy groups like the SBA are also great resources.