Payroll records document the process of compensating employees and include wages, benefits, hours worked, and taxes deducted. It’s important that these records are complete, accurate, and maintained for the legally required time period. That includes 3 years for federal requirements and 4 years for Internal Revenue Service (IRS) requirements. Some states have even longer requirements.¹
Whether payroll records are generated in-house or through a third-party payroll provider, records must be properly created and safely stored. Failing to keep payroll records correctly can subject an employer to federal and state penalties and fines.
This article will discuss the types of records you are required to keep and the benefits of keeping accurate records. It will also provide an overview of the legal requirements concerning payroll records and some best practices.
What are payroll records?
Payroll records are all the documents used to keep track of employee compensation. A payroll record should include pay rates, pay period dates, total compensation including bonuses, gross pay, and tax deductions.
Maintaining accurate payroll records is crucial to ensure that:
- Employees are paid the correct amount.
- Your company is compliant with federal, state, and local laws that require employers to keep and maintain accurate payroll records.
- Your company has proof that it is reporting and paying payroll taxes correctly and complying with wage and hour laws.
What types of payroll records and information must be kept?
Figuring out how long to keep employee payroll records can be complicated. Federal, state, and local agencies may have different requirements. Some types of payroll documents need to be kept longer than others. Here’s an overview of different types of payroll records:
Employee personal information
Personnel records should include full legal name, Social Security number, address, date of birth, sex, occupation, and emergency contact information. These employee documents should be kept for 3 years to meet the requirements of the Fair Labor Standards Act (FLSA). Other items might include:
- Offer letters and payment agreements.
- Exemption status.
- Direct deposit authorizations.
- Benefit and stock purchase plans.
- Job evaluations.
- Purchase records and expense reimbursement receipts.
Time and attendance records
FLSA requires that for nonexempt employees, records are kept of when their workweek begins, hours worked per day, overtime earnings, and the total hours worked per workweek. These should be kept for 3 years. Timecards and other records used to calculate wages need only be kept for 2 years.
Wage and salary information
For nonexempt employees, keep records of their regular hourly pay rate, total regular pay, and total overtime pay. Keep for 3 years.
Payroll tax withholding information
You should keep records of all taxes deducted from employees’ paychecks. These include federal, state, and local income tax and FICA (Social Security and Medicare). The IRS requires organizations to keep payroll tax records for at least 4 years.
Detailed records regarding paid and unpaid employee leave should also be kept. That includes personal time off, vacation and sick leave, and Family and Medical Leave Act (FMLA)-related time.
Other payroll deductions
Also keep records of other amounts deducted from employee paychecks, such as their contributions to pensions and other qualifying funds.
Remember that local and state government agencies may have longer requirements for retaining payroll records. To play it safe, you may want to keep records longer than required, perhaps for the life of your company.
Benefits of accurate payroll records
Maintaining accurate payroll records will help ensure that your business runs smoothly and avoids problems in the future. Benefits include:
- Proper employee compensation.
- Compliance with federal, state, and local labor laws.
- Accurate financial reporting.
- Proof that you are paying employees correctly.
- Accurate data to manage labor expenses.
- For employees, these records provide proof of employment.
Legal requirements for payroll records
Different federal, state, and local government agencies have payroll recordkeeping requirements for employers. These include the Occupational Safety and Health Administration (OSHA), the Equal Employment Opportunity Commission (EEOC), and the Department of Justice. Some retirement savings documents must be saved according to Employee Retirement Income Security Act (ERISA) regulations.
Failure to meet the legal requirements might subject your company to an audit by the IRS or local tax agency. Without proper records, your company won’t be able to defend itself. You could also lose a lawsuit if you don’t have accurate records to prove that you paid what you should.
Payroll recordkeeping best practices
You should maintain records in a way that keeps them secure, organized, and accessible. You may keep hard-copy or digital records or a combination. While smaller businesses may rely on hard copies, the use of payroll software is becoming more common. The advantages of digital records include reduced chance of loss or destruction, greater accuracy, and cost-saving automation of routine tasks.
- Keep hard-copy records in fire-safe filing cabinets or other storage containers.
- Store digital records on hard drives, on secure servers, or in the cloud.
- Conduct regular audits and reviews.
- Ensure that the records are kept confidential.
Storing and maintaining payroll records correctly is essential for the smooth functioning of your company. It prevents problems with the IRS, other government agencies, and employees making wage and hour claims. You must ensure compliance with all federal, state, and local laws and that all payroll records are accurate and complete. There are many details to keep track of, and businesses often use payroll services companies to ensure they maintain HR compliance.
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