Payroll RecordsRequirements and What Needs to be Included
Payroll records are the detailed documents that every employer must keep regarding how they have compensated each individual under their employ.
This document outlines an employee’s pay rate, the hours they worked, any tax deductions, contributions to benefit plans, total compensation, and more.
There is no standard length of time for which these records must be maintained.
Instead, there are both federal and state requirements dictating distinct lengths of time, which generally are for several years.
The primary purpose for which these documents are retained is to ensure that employers remain in compliance with tax and employment regulations; however, there are additional benefits to maintaining these records, such as guarding against claims of underpayment and making financial decisions regarding labor costs.
What Are Payroll Records?
Payroll records refer to the various documentation regarding the compensation an employer provides their workers.
These records are needed for a company’s payroll staff to calculate every employee’s gross and net pay as well as to meet regulatory requirements.
This broad term can include a wide variety of documentation related to paying employees, from hiring documents to pay stubs and tax withholding forms.
Any documentation that relates to the number of hours an employee works, any pay and benefits they are provided and anything associated with tax deductions and withholding should be retained.
Why Must Payroll Records Be Retained?
The primary reason why payroll records must be retained is that it is required by a number of laws on both the state and federal levels.
These laws, including those under the Fair Labor Standards Act (FLSA) and Equal Employment Opportunity Commission (EEOC), require payroll records to be kept for every employee.
In addition to ensuring that employers remain in good standing with the law, payroll records are of immense value to employers for managing expenses, providing proof to back up employee compensation in case of disputes, and helping to make decisions regarding employee raises.
Payroll records also play a crucial role when it comes to taxes.
If the IRS should ever perform an audit, payroll records act as proof to back up any claims and avoid lengthy investigations or even potential penalties.
Payroll Record Retention Requirements
There are several federal and state requirements governing payroll record retention.
For federal requirements, some of the most major laws and organizations governing the retention of payroll records include:
- Fair Labor Standards Act (FLSA): This law requires employers to retain most payroll records for both exempt and non-exempt employees for a minimum of three years and wage computation records such as timesheets for a minimum of two years.
- Age Discrimination in Employment Act of 1967: This Legislation requires a minimum holding period of three years for all payroll records.
- Equal Employment Opportunity Commission (EEOC): The EEOC separately requires that employment and personnel records be maintained for a minimum of one year. This applies to involuntarily terminated employees as well. For terminated employees, the year will be calculated starting from the date the employee’s relationship was terminated.
- Americans With Disabilities Act (ADA): For businesses with 15 or more workers, all ADA-related documentation must be retained for at least one year.
- Employee Retirement Income Security Act (ERISA): Section 107 requires that employers retain certain documentation relating to employee retirement savings plans for a minimum of six years. In some cases, however, ERISA may require a much longer retention period.
- Internal Revenue Service (IRS): For tax-related documentation such as W-2s, W-4s, Form 941, and all other documentation related to payroll taxes, the IRS requires a holding period of at least four years.
In addition to federal requirements, there are a number of state-level requirements governing the retention of these records.
Because these requirements differ considerably from state to state, it is important for businesses to research any of the specific state laws that may apply to them.
For example, in New York, payroll records must be retained for at least six years, whereas in Texas, they only must be held for four.
In many cases, state-level laws may require a longer retention period than federal requirements, such as for tax-related documentation, which may need to be retained for up to eight years in some states rather than the IRS-mandated four years.
As a result, it is crucial to check in order to avoid non-compliance.
What Should Be Included in Payroll Records?
Payroll records that should be retained include not only a record of how much each employee was paid for a period but a variety of related employment documentation as well.
This includes documents used to help determine how much the employee was owed as well as a variety of other documentation related to compensation.
Payroll records should include, at a minimum, the following documentation:
Payroll records should include documentation that identifies and provides basic information relating to each employee, including their:
- Date of birth
- Social Security Number
- Telephone number
- Direct deposit information
- Benefit plan enrollment
The W-4 and W-2 forms for every employee should be retained with payroll records.
Whenever a new employee is hired, they will complete a W-4 which will include their name, address, Social Security number, and information about any tax adjustments to which they may be entitled. In addition, employers will complete a W-2 annually so that employees can submit their own tax returns to the IRS.
Employers also must complete a Form 941 annually in order to report the amount of unemployment tax that they paid, and wage detail reports every quarter.
These employer-related tax reports and Forms W-2 and W-4 should be retained with payroll records as well as any other tax-related documentation that may be required in regards to an employee.
Time and Payment Information
It is important for employers to maintain records that show how they determine an employee’s total compensation.
This means retaining documentation showing an employee’s pay basis, such as salary, hourly, tips, or commissions, the employee’s total rate of pay, reimbursements for work-related expenses, and their classification as exempt or non-exempt.
In addition, all documentation showing the amount of time the employee worked and the time period covered by the payment will be required to determine what they were owed.
This includes work schedules, timesheets, the start day of a workweek, overtime hours worked, as well as all used and remaining paid time off.
In the case of termination, information regarding the employee’s last day worked, and all final payments should be retained.
Information Concerning Deductions
All deductions made from an employee’s pay should be documented and retained.
This includes a deduction for benefit plans, mandatory wage garnishments, union dues, and deferred compensation.
What Should Be Done With Payroll Records After the Required Retention Period
After the required retention period for a record is complete, it should be promptly disposed of to protect confidential employee data from misuse.
The longer an unnecessary document is retained, such as photocopies of employee documents, including driver’s licenses and Social Security Cards and banking information, the greater the risk is of these documents being stolen or misused.
However, these documents cannot just be thrown away.
Instead, they must be disposed of in a secure manner.
How this is completed will depend on the document’s format.
For digital files, they can simply be permanently deleted, but for paper documentation, this can be more cumbersome.
Paper documentation should either be incinerated or thoroughly shredded and disposed of in a secure location.
Often companies with a significant amount of paper records will choose a third-party provider to pick up the records and dispose of them properly.
At the time the records are destroyed, it can be a good idea to retain a record of what documents were destroyed and the date it was performed.
Often this can simply take the form of a spreadsheet that lists the type of document, the date it was destroyed, and the signature of the person that destroyed them.
How Should Payroll Records Be Stored?
With the exception of certain state requirements, there are generally no specific requirements relating to how payroll records should be stored.
Traditionally these documents would simply be stored in locked filing cabinets with limited access due to their sensitive nature.
However, increasingly these forms are stored digitally in order to simplify the storage and disposal process.
When payroll records are stored digitally, it is important to ensure that they remain organized and secure.
In order to ensure the security and safe storage of these crucial records, many companies pay for off-site storage or dedicated software to track and store these documents.
Regardless of the storage method that is chosen, it is important to ensure that it is manageable so that it can be used in a consistent manner to ensure that records are secure and able to be accessed whenever necessary.
The Bottom Line
Payroll records include all documents related to how a company compensates its employees.
This includes a wide range of documentation, including employee schedules, pay stubs, tax withholding forms, and often much more, which should be retained in compliance with state and federal requirements.
Payroll records should be stored securely until they are no longer needed, at which time they should be shredded or destroyed to prevent unauthorized access.
Frequently Asked Questions
What Are Certified Payroll Records, and How Long Should They Be Retained?
Certified payroll records are documents that record the weekly earnings of employees working on federally funded projects to ensure compliance with prevailing wage requirements.
These records generally must be maintained for a minimum of three years. However, in some cases, these may need to be retained for a longer period.
How Long Should Terminated Employee’s Files Be Retained
The EEOC requires payroll records to be retained for terminated employees for a minimum of one year.
However, under the FLSA, payroll records must be retained for terminated employees for at least three years following their date of termination.
- Payroll records include documentation regarding what compensation they provided to each employee and how it was determined.
- Often a considerable number of components go into payroll records, including documentation regarding hours worked, withholding forms, pay rates, and more.
- The minimum retention periods for payroll records are governed by both state and federal laws and generally require documentation to be retained for several years.
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Internal Revenue Service "Employment Tax Recordkeeping" Page 1 . September 22, 2022
US Department of Labor "Recordkeeping Requirements under the Fair Labor Standards Act " Page 1 - 2. September 22, 2022