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As a small business owner, you’re one of over 6 million employers who keep the economy moving forward. And with great power comes great responsibilities, including retaining your payroll records. It doesn’t matter if you are a bootstrapped startup or a family-owned firm celebrating 125 years in business, a number of federal laws require you to keep payroll records on file.
As a rule of thumb, employers are required to retain some payroll records for at least four years, but some experts say it’s a good idea to hang onto your files even longer. Different agencies set the rules, and while you definitely don’t have to hang onto your pay stubs and tax forms forever, there may be some reasons to store your records longer than the statutory minimums. You should talk to a tax or employment law expert if you’re at all unsure about your obligations.
How long does the IRS require you to retain payroll records?
The IRS says you must keep records related to employment taxes for at least four years after your last completed tax filing — whether those filings are annual or quarterly. You’ll need records to be available should the IRS choose to conduct a review. Here is what you need to keep records of:
- Your employer identification number (or EIN)
- Any amounts and dates of all wages, annuities, and pension payments
- Amount of tips reported
- Fair market value of in-kind wages paid
- The names, physical addresses, social security numbers, and jobs of your employees
- Employee copies of Form W-2 — if they came back to you in the mail as undeliverable
- Dates of employment
- Periods that employees were paid while absent from work due to sickness or injury, and the amount and weekly rates you or third-party payers made to them
- Dates and amounts of tax deposits you made
- Copies of returned files
- Records of allocated tips
- Records of fringe benefits provided, included substantiation
- Duplicate copies of tax returns/tax deposits
- Returned copies of Form W-2
- Canceled/voided checks or reversed electronic payments
- Employee’s name/address/occupation/social security number
- Amount/date of payments for wages, annuities, pensions, tips; fair market value of wages‑in-kind
- Record of allocated tips
- Amount of wages subject to withholding
- Taxes withheld (and date if different from pay date)
- Copies of Form W-4 (for at least four years after the date the last return was filed using the information on the Form W-4)
- Agreements to withhold additional amounts
This may sound like a lot of information, but most of it should either be contained within the various employment tax forms you file with the IRS or documented in your bookkeeping if you keep a clean general ledger.
How long does the FLSA say you must keep payroll records?
The (Fair Labor and Standards Act) FLSA says to retain payroll records for a minimum of three years for each non-exempt worker. Note that while the FLSA does not have specific instructions on how you organize your files, their website states, “records must be kept at the place of employment or in a central records office.” Here is the list of records to keep:
- Employee’s full name and social security number
- Physical address, including the zip code
- Date of birth, if the individual is younger than 19
- Sex and occupation
- Both the time and day of week, when the employee workweek begins
- Hours the employee works each day
- Total hours worked each week
- Basis on which an employee’s wages are paid (some examples you could provide:
- Hourly pay rate: $11 per hour, Weekly: i.e. $440 per week or Piecework
- Regularly hourly pay rate
- Total daily or weekly straight-time earnings
- Total overtime earnings for the workweek
- All additions to or deductions from the employee’s wages
- Total wages paid each pay period
- Date of payment and the pay period covered by the payment
How long do you keep records used to calculate wages?
Separately, the FLSA requires that you hold onto the records that wage computations are based on for two years. So — any and all — documents you use to calculate payments for your employees. The FLSA lists out some examples to give you an idea of what these records should include:
- Wage rate tables
- Timecards and piece work tickets
- Work and time schedules
- Records of both: additions to OR deductions from wages
Next on the list, the US Equal Employment Opportunity Commission (EEOC) also has rules on records related to wages: “employers must keep for at least two years all records (including wage rates, job evaluations, seniority and merit systems, and collective bargaining agreements) that explain the basis for paying different wages to employees of opposite sexes in the same establishment.”
- Wage rates
- Job evaluations (such as performance reviews)
- Seniority and merit systems
- Collective bargaining agreements
Are there retention system requirements for storing payroll records?
You’re free to choose the retention system that works best for you, and many employers are heading in a digital direction for record-keeping. Also, some industry experts agree it can be a good move, including Rachel Grantham, a payroll and accounting professional with over 20 years of experience. According to Rachel, retaining records digitally has its advantages:
- Electronic record storage allows you to organize each specific payroll period with all relevant documentation in a quick and accessible format for any audit purposes.
- Going paperless prevents the possibility of losing paperwork or misplacing any physical file folders. Using a standard naming convention for records makes saving documents easy and convenient.
- Choosing an electronic storage method over paper filing can also affect your bottom line by saving on any unnecessary document storage costs.
If you have always held onto hard copies of your payroll records and want to go digital, it can be as simple as scanning all your documents and saving them electronically. Or you can switch to a digital platform and hang onto your paper records for four years (or as specified above). Once the retention requirements have passed, you’ll be able to rely on your digital records going forward.
If you’re just getting your business off the ground — or rethinking how you want to organize your recordkeeping — it doesn’t need to be complex. For some pointers, we caught up with Kelly Finn, a certified payroll professional (CPP) with over ten years of industry experience. According to Kelly, here are some ideas that could be worth considering:
- It can be helpful to create individual employee folders for storing documents — organized in alphabetical order — by employee last name. For example, instead of a folder just to file all 401(k) documentation, or a separate folder that holds all performance reviews, file these records in each employee folder.
- The system works whether you organize files electronically or on a secure server. Or if you prefer to keep hard copy paperwork and folders for each employee in a filing cabinet or other storage container.
- I-9 forms must be filed separately. An I-9 is a document that proves a person is eligible for work in the US and only certain authorized parties should have access to it. It can be a good idea to store each employee’s I-9 record in one separate folder.
- Keeping files in one accessible location can also be helpful for your employees. They can reference items such as new hire packets, any policy documentation, or if they need to provide proof of when their insurance was activated.
Why should you retain payroll records?
At the risk of sounding like a broken record, keeping payroll documents on file — and easily accessible — is a big deal since federal, local, and state laws require it. So, getting a handle on retaining them can help you stay compliant and avoid breaking the law. Also, you never know if you may need them down the road.
For example, what would happen if you were subject to an audit by the IRS? Or maybe a former employee decides to bring legal action against you? In the unlikely event you need these documents to defend yourself, getting organized can provide peace of mind and keep any surprises from being too disruptive.
Should you keep payroll records longer than the requirements?
OK, we’ve covered a lot of ground. The main takeaway is all employers should probably have a plan to keep those pesky payroll records on file and accessible. If you like to play it safe, the Small Business Association says keeping them for up to six or seven years is a sound strategy.
In the end, the IRS even suggests it can make sense not to get rid of records at all as you could need them down the road. For example, they cite insurance companies and creditors as entities that may require you to keep them longer than the IRS.
So, it might just be good practice to hold onto these files for the life of your business. And since most online business payroll companies offer unlimited digital record storage, you won’t have to worry about space requirements usually associated with hardcopies and document storage. Just keep in mind that ultimately it’s your responsibility as the employer to produce these records when called upon.
We realize there is a lot to keep track of — so use our cheat sheet to keep it all together. See the table below (or download a printable PDF) and tack it up in your workspace.
|How long?||Who requires it?||What is the payroll record you must keep?|
|Four years||IRS||To stay compliant, keep a record of your employee identification number (or EIN) on file|
|Four years||IRS||To stay compliant, keep a record of all dates and amounts of wages, annuities and pension payments.|
|Four years||IRS||To stay compliant, keep records of the amount of tips reported|
|Four years||IRS||To stay compliant, keep a record of fair market value of in-kind wages paid.|
|Four years||IRS||To stay compliant, keep a record of all names, addresses, social security numbers, and occupations of each employee|
|Four years||IRS||To stay compliant, keep a record of any employee copies of form W-2 that got returned to you as undeliverable|
|Four years||IRS||To stay compliant keep all dates of employment on file and some of the most used are hire date, re-hire date, and termination date|
|Four years||IRS||Keep records of any periods for which employees were paid while absent from the job due to sickness or injury. You also need to have the amount and weekly payment rates from you or any third party.|
|Four years||IRS||To stay compliant, keep records of employees’ and recipients’ income tax withholding certificates. Specifically forms W-4, W-4P, W-4s, and W-4V.|
|Four years||IRS||To stay compliant keep records of the dates and amounts of tax deposits you have completed|
|Four years||IRS||To stay compliant keep records of any tax returns that are filed|
|Four years||IRS||To stay compliant, keep records of any allocated tips|
|Four years||IRS||Records of fringe benefits provided, including substantiation|
|Three years||FLSA||Keep a record of the name of the employee, their physical or mailing address, their occupation, birth date, and gender designation.|
|Three years||FLSA||Keep a record of hours worked each day and week.|
|Three years||FLSA||Keep records of all dollar amounts and dates of payment.|
|Three years||FLSA||Keep records of dollar amounts earned for straight time and overtime/additions to and deductions from wages|
|Three years||FLSA||Keep records of collective bargaining agreements|
|Three years||FLSA||Keep records of sales and purchase records|
|Three years||FLSA||Keep records of work time schedules|
|Three years after the employee hire date||USCIS||Keep records of any employee I-9 Forms|
|Two years||EEOC and FLSA||Keep records of time cards and wage rate tables|
|Two years||EEOC and FLSA||Keep records of all production, order, shipping, and billing|
|Two years||EEOC and FLSA||Keep records of both additions to or any deductions from wages|
Though there can be a lot of payroll records to keep track of, keeping it all straight should get easier once you have a plan in place. Also, use our guide to some common employee payroll tax forms to stay up-to-date on the different documents and deadlines. Good luck with your team — we hope you never need any of your old records!
Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.