This article serves as a guide to help you maintain an accurate payroll record for your employees. You’ll learn everything you need to know to feel confident in your recordkeeping.
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What Are Payroll Records?
Payroll records consist of any forms or documentation your business generates that relate to employee compensation, work hours, and anything related to pay. Payroll tax and labor laws regulate the workplace and how employees are paid so the documentation involved is an important feature of compliance.
Payroll records are the body of evidence to your due diligence as an employer. These records span from new hire paperwork to the final forms of an employee separation or retirement. Although payroll records and employment records are separate requirements, there is some overlap.
Maintaining records can be time consuming, but it helps to understand the purpose behind records retention and the risks involved in a failure to comply with standing requirements.
Why You Need to Keep Record of Pay
There are several reasons to keep detailed records of payroll and forms related to compensation. Although it may seem at times like you are hoarding reems of outdated forms and reports, there is a strong business case for records retention. Below are three of the most important and advantageous reasons to keep payroll records.
- Smooth business operations. It’s always a good idea to keep payroll records to help with any reporting. For example, keeping W-4s on file can make reporting employee income on a W-2 much easier.
- Compliance. Payroll tax and employment law and governing bodies (IRS, FLSA, EEOC) require certain documents be retained for a specified number of years to assist with reporting, oversight and auditing.
- Legal defense. There may be a time when you need to prove your company’s due diligence, safety and integrity in matters of compensation and employment using payroll records.
What Payroll Records You Need to Keep
You might be surprised at what matters when it comes to payroll recordkeeping. Not only do you retain pay records but also some employment documentation that relates to compensation. Below are the critical elements of a thorough payroll record.
1. Information and Documentation
Your payroll records must include identifying and clarifying information about each employee, including name, Social Security Number (SSN), sex, occupation, employee schedule, payment agreement (hourly, salary, part-time, full-time) and rate of pay.
You will also include important documentation about each employee, such as total regular and overtime earnings, all deductions, additional pay, date of payments and pay period. Employee pay stubs typically reflect both the information and documentation required for records so it’s a good idea to retain a copy of each employee pay stub.
2. W-4s and W-2s
Both employee W-4s and W-2s must be kept on file as payroll tax documentation. New employees complete a W-4, which contains their name, address, SSN and tax allowances. You complete a W-2 for each employee reporting their earnings and withholdings to the IRS so that employees can file their annual tax return.
3. Unemployment Forms
Employers submit Form 941 as part of their annual tax return to report how much federal unemployment tax your company paid. Additionally, keep the wage detail reports your company sends quarterly to state unemployment and tax authorities.
4. Employment Eligibility
The United States Citizenship and Immigration Services (USCIS) Form I-9 shows your due diligence to verify an employee’s authorization to work in the United States. These forms contain necessary information for the Department of Labor and must be retained separately from employment records.
5. New Hire Reports
New hire reports go to the state within a few days of hiring a new employee and you must keep a copy of these reports as well.
How Long Should You Hold On to Records?
Different federal, state and local agencies along with various payroll tax and employment laws determine the requirements for record retention. To create an accurate record retention schedule, you need to consider these individual requirements that involve payroll records:
- Employment taxes. You must keep all records relating to employment taxes for a minimum of four years. These forms include W-4s, W-2s, Form 941 and any other record or report on payroll tax. These guidelines come from IRS requirements but you should also check state and local recordkeeping requirements which can range from three to eight years.
- Payroll records. All payroll records should be kept for a minimum of three years. This documentation includes copies of pay stubs, payments and pay periods.
- Wage determining records. Any information used to determine wages should be kept for a minimum of two years. The FLSA considers employee work schedule, regular and overtime hours worked, pay rate and exemption status as wage determining records.
- Retirement plan records. Forms and reports related to employee retirement plan participation must be kept on file for a minimum of six years.
- Americans with Disabilities Act records. Any documents related to the ADA must be kept for a minimum of one year for businesses with at least 15 employees.
- Family Medical Leave Act records. Documentation regarding employee FMLA must be kept up to three years.
Where Should Records Be Stored?
There are no specific requirements for payroll record storage, but there are some recommendations. You can keep digital or paper records, although digital recordkeeping can simplify storage, reporting and destruction of sensitive material.
Because payroll and employment documents contain sensitive, private employee and business information, you need to ensure the integrity and safety of these forms. Paper forms need to be kept in locked HR filing cabinets with limited access, and digital forms need to be in encrypted files.
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Amanda has spent over 10 years building a career in Human Resources in the non-profit sector. Her roles have included HR assistant, recruitment and onboarding coordinator, and manager of learning and professional development. Although Amanda enjoys her time as an HR consultant now, she prefers to use her experience to strengthen the field through the education and development of its practitioners.
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