GLOBAL PAYROLL
34 | TECHNICAL
Keep It or Toss It? A Guide to Record-keeping Requirements*
M anaging payroll records isn’t just good practice; it’s a legal necessity. Employers must navigate a complex web of federal and state laws and regulations to ensure payroll documentation is accurate, accessible and retained for the appropriate length of time. From Internal Revenue Service (IRS) and Social Security Administration (SSA) requirements to the Department of Labor (DOL) and state and local mandates, understanding what to keep (and for how long) can protect organisations from audits, penalties and compliance pitfalls. IRS and SSA baseline requirements The IRS and SSA require a minimum four- year retention period. Date parameters vary based on the type of record. Regulations don’t specify which medium to use for record- keeping but require that records be legible, secure and retrievable on request. Employee name, address, occupation and social security number are to be retained during employment regardless of length of service. The most recent information is to be on file for four years following termination date. Copies of the form W-4, the ‘Employee’s Withholding Certificate’ must be retained for at least four years after the date an employee would have filed a tax return using information from that form. Employees changing forms W-4 periodically should have multiple copies on file. Outdated forms may stay. Payroll records to retain are: l dates and amounts of all employee compensation including cash and non-cash wage income l annuities l pensions l declared and distributed tips l allocated tips l any other items of value. Taxes withheld (or paid by employer) must be reported with date of withholding and any other deductions should also be tracked. Cancelled / voided cheques are also maintained. If forms W-2, ‘Wage and Tax Statement’ are provided online, employees must agree to electronic receipt or opt-out, and that choice must be retained too. Copies of all the organisation’s tax returns,
tax deposits, forms 941, 941-X, 940, W-2, W-3, 944, 945, 1042, 1099-MISC, 1099-NEC and applicable Schedules (whether filed on paper or electronically) must be retained for four years after filing or payment, whichever is later. Undeliverable W-2 forms must be kept for four years. Retaining a scanned copy of the returned envelope provides proof of mailing. IRS audits or lawsuits extend the retention period because records may not be destroyed while under audit or when scheduled for examination. DOL baseline requirements The general record retention rule for the DOL is three years with no specific format, but records must be legible and retrievable. All three labor laws – the Fair Labor Standards Act (FLSA), the Family and Medical Leave Act (FMLA) and the Immigration Reform and Control Act (IRCA) – require employee name, address and occupation. The FLSA and FMLA require daily and weekly hours worked, amounts / dates of payments and wage deductions. The FLSA requires a breakdown between straight time and overtime pay. In addition, the FLSA requires copies of collective bargaining agreements, sales and purchase records, birth date and gender. Supplemental records / timecards have a two-year retention requirement. The IRCA record retention rule for form I-9, ‘Employment Eligibility Verification’, is the latter of three years after the date of hire or one year after the date of termination. Employees hired by an organisation before 7 November 1986, don’t require a form I-9. The FMLA requires dates or hours of FMLA leave, employee benefit premiums, records of disputes, FMLA general or specific notices and plan descriptions. Record retention considerations and choices When deciding which records to retain and how to store them, an organisation must consider numerous things. Federal laws take precedence over state and local laws, if the federal laws are stricter and provide greater protection to
employees. However, if local laws have more requirements, they must be honored in those jurisdictions. A choice can be made to observe each separately or to, perhaps, select the most robust standard and use that for all. An employer may choose to retain records beyond the minimum retention requirements. But consider whether there’s space to do so and how that will be maintained. If an organisation is using a payroll provider, how does the employer ensure the records are properly maintained and available? This can be a serious issue if the employer changes vendors. Which format works best for the employer? As formats and technology are updated, are records transferred to new platforms? Or are multiple formats used, and can older information be retrieved? Whether you’re keeping records for four years or longer, clarity and consistency are key. By understanding federal requirements and making thoughtful choices about formats, vendors and retention timelines, organisations can not only meet legal standards but also support operational efficiency and risk management.
*This article relates to US payroll practices.
PayrollOrg (https://ow.ly/Pyh550WXogI), is the global leader in payroll education, publications and training. This non-profit association conducts more than 300 payroll training conferences and seminars across the country each year and publishes a complete library of resource texts and newsletters. Representing more than 20,000 members, PayrollOrg is the industry’s highly respected and collective voice in Washington, D.C. Get more information at: https://ow.ly/ Pyh550WXogI.
Gretchen Inouye CPP
US Payroll Specialist
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