Payroll 101: What to Know About Payroll Record Keeping for Your Small Business
However you choose to handle payroll record keeping, make sure you always have a backup.
Payroll record keeping is important for every business, even one that employs only one or two people. But with all the forms and documents, it can be overwhelming and confusing to determine which records to keep.
Maintaining the Right Records
Employers are required to keep several records on file for each employee, including payroll records. On a federal level, "the guidance from the IRS is, thankfully, pretty clear," says Jessie Mennis, compliance program specialist at ADP. Among other items, employers must retain the following records for employees:
- Dates of employment
- Employer identification number
- Amounts and dates of all wages
- Amounts of tips reported
- Annuity and pension payments
The IRS lays out the full specifics of what needs to be kept for federal employment tax purposes. However, you'll likely need to keep additional information. States often have their own requirements, plus requirements vary for federal contractors. Many of the reports maintained for IRS purposes are also needed for workers' comp coverage, insurance companies and federal and state labor department audits, Mennis says.
Make sure you check with the appropriate federal and state authorities to ensure you're keeping documents for an appropriate period of time. The IRS maintains that employers keep records of employment taxes for at least four years after filing the fourth quarter for the year. However, the time period can extend to seven years or a lifetime if you fall into one of the special circumstances detailed by the IRS.
The Fair Labor Standards Act (FLSA) also requires employers to keep certain records on file for a minimum of three years. This includes, but is not limited to information about hours, total weekly hours worked, the basis on which employees are/were paid (hourly, salary, piecework), regular hourly pay rate, total daily or workweek straight time earnings and total overtime earnings per workweek. The FLSA also mandates that employers keep time cards, schedules or whatever records are used for computing wages for two years.
While these records must be available for inspection by their representatives, the Department of Labor (DOL) takes the position that employers may choose the timekeeping method, as long as it is complete and accurate. State wage and hour rules may have more stringent recordkeeping rules, including around wage statements. So, employers should familiarize themselves with those requirements.
With all these records to maintain, it can be challenging to determine how and where to keep them but today's technology can simplify the process. "An easy way to keep payroll records organized is through online or electronic record keeping," Mennis says. She recommends "a time clock that syncs to an electronic payroll record and then coordinates payment records and pay stubs."
For instance, most electronic and online payroll systems hold a profile for each employee that aggregates DOL-required information. In many cases, they also offer tax-filing services. This helps ensure that tax payments reach the IRS on time and keeps records transparent and accessible. For example, ADP's payroll system allows client-authorized accountants to easily access payroll records and reports. Many payroll services also give employees access, so they can view their W-4 withholding selections, pay stubs and paid time off information.
However, you choose to handle payroll record keeping, make sure you always have a backup. "If you primarily keep paper copies of records, it is important to securely store copies of these records in a different location or electronically," Mennis advises.
See part four of Payroll 101: What to Know About Payroll Deductions
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You should consult experienced counsel to understand any applicable federal, state, local and industry-specific retention rules.