Retaining Payroll Records

Let's start by reviewing what federal law requires you to retain:

• Each employee's personal information, including their full legal name, Social Security number, contact information, emergency contacts and occupation, needs to be kept. If you offer benefit plans, the benefits enrollment data should also be retained.
• Retain each employee's offer letter, eligibility data, designation of full- or part-time status, background check, references, evaluations and termination information, if applicable.
• The employee's classification, whether exempt or nonexempt, should be retained.
• All tax documents should be kept. These include federal, state and local jurisdiction tax forms, such as Form W-4, Form W-2 and state tax withholding certificates.
• Each employee's Form I-9 should be saved.
• If there are deductions from the employee's pay, including wage garnishment orders, union dues and deferred compensation information, these must be kept.
• Keep all records of paid and unpaid leave, including paid time off, vacation time and associated payment amounts, plus records for other types of leave, such as leave under the Family and Medical Leave Act, state paid leave programs and paid sick leave.
• If you offer direct deposit, retain the financial institutions' names plus routing andaccount numbers.
• All reimbursement forms must be kept, whether for work travel or expenses like office supplies.
• Payroll registers, pay period beginning and ending dates, payment dates and types of payments (commissions, bonuses, tips) must all be retained.
• Any authorization for release of private information must be held.
• Documentation and justification for pay raises should be saved.
• Profit-sharing or award paperwork should be kept.

If you use payroll management software, you will probably find that it has built-in standard recordkeeping reports.

Additional retention rules

The Fair Labor Standards Act has its own list of information and documents that must be kept. For each employee, these are:

• Full name and Social Security number
• Address, including ZIP code
• Birth date (if younger than 19 years old)
• Gender
• Occupation
• Time and day of week that marks the beginning of the workweek
• Hours worked each day
• Total hours worked each workweek
• Basis on which wages are paid (for example, by hour, by week or by piece)
• Regular 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
• Number of hours worked if not on a fixed schedule
• Total wages per pay period
• Date of payment and the pay period covered by the payment

Any timekeeping method is acceptable under the FLSA as long as it's complete and accurate. All records must be open for inspection by FLSA representatives.

Length of records retention

The federal government requires that payroll records (including dates of wages, dates of employment, and dates and amounts of tax deposits) be kept for four years in case there is an IRS audit. However, state and local jurisdictions may require you to retain the records for longer. Other government agencies have their own requirements, which are outlined below.

The Equal Employment Opportunity Commission requires that you keep personnel and employment records (including applications, promotions, demotions and terminations) for one year. The EEOC and the Department of Labor both require that timecards, work and time schedules, and wage rate tables be kept for at least two years.

The FLSA mandates that records relative to gender, occupation, workweek, hourly pay rate and bargaining agreements be kept at least three years.

Section 107 of the Employee Retirement Income Security Act requires employers to save documents related to retirement savings plans for at least six years.

Payroll records may be destroyed once they are not required to be retained; this provides a measure of protection for employee confidentiality.

Careful and flexible storage

For paper records, you need fireproof safe storage. If you store records digitally in the cloud or via external hard drives, it is essential that you have a backup system should the first system be hacked, corrupted or otherwise compromised. If you automate records using payroll software, you must be able to download payroll-related reports at any time. Whatever your storage method, your payroll tax records need to be readily available for the IRS.

Maintaining payroll records is required, and it benefits your company. The data can help create better budgets and manage labor expenses. Employees benefit by having readily available the information they need to verify employment — for example, when they want to rent an apartment or apply for a loan. Any company, even one with just one employee, must maintain complete payroll records for compliance.