All business owners are responsible for maintaining payroll records on behalf of each employee. This includes documentation detailing how wages are determined, payroll taxes, and more. But why is it so important that you hold onto them?
There are federal and state laws that require employers to keep payroll records for several years. The main purpose of keeping payroll files for each employee is to remain in compliance with regulatory bodies like the Internal Revenue Service (IRS) and the U.S. Department of Labor (DOL). However, maintaining detailed payroll records for several years can also benefit your business directly. Payroll records can be used to make decisions about raises, protect your business against claims of unfair or incorrect payment, and more.
To protect your business, use this guide to payroll records, so you know what’s required of you. Use the links below for quick answers to your questions.
- What are payroll records?
- Why do you keep payroll records?
- What should be included in payroll records?
- How long do you need to keep payroll records?
- Where should you store payroll records?
Payroll records is a blanket term that applies to all documentation associated with paying employees, from hiring documents and direct deposit authorization forms to paystubs. This includes anything that documents total hours worked, their pay rate, tax deductions, employee benefits, etc.
In accordance with the Fair Labor Standards Act (FLSA), employers are required to keep most payroll records for at least 3 years. This law applies regardless of employment status, including both exempt and non-exempt employees.
First and foremost, holding on to payroll records is required by law. In order to remain in compliance with these laws and regulations, including those set forth by the FLSA and The Equal Employment Opportunity Commission (EEOC), you need to keep payroll files for each and every employee.
Payroll record retention is also important for business purposes. Payroll records are useful for tracking expenses, providing proof to back up payroll calculations, and documentation of employee background for reference when planning raises. Payroll files are an essential facet of employee records.
In addition to employee-related matters, keeping your payroll records can also be beneficial when it comes to your taxes. In case of an IRS audit, you’ll want to have payroll files on hand to back up any claims made on your income taxes.
On the federal level, there are several key pieces of legislation that you should be familiar with. This includes both the FLSA and Age Discrimination in Employment Act of 1967 (ADEA). Under the FLSA requirements for payroll, records must be kept on hand for 3 years. They also set requirements for what information must be included, and that timekeeping must be complete and accurate.
The Age Discrimination in Employment Act of 1967 (ADEA) also requires that payroll records be kept for 3 years. The Equal Employment Opportunity Commission (EEOC) also enforces labor laws, including that you must hold on to employment records for at least 1 year.
It’s important to note that state requirements may differ from one another, so you should research the laws that may pertain to your business. This is essential to keeping your business in compliance with regulating authorities, as many states require you to keep payroll records for longer.
While there is no requirement for how your payroll records are formatted and stored, there is specific information that needs to be included. When compiling your employee payroll records, make sure to include the following details:
- Employee’s full name
- Social Security number
- Start date
- Birth date
- Total hours worked
- Pay rate
- Daily or weekly straight-time earnings
- Total overtime earnings
- Start day of the workweek
- Payroll deductions from employee’s wages for stock purchase plans, garnishments, etc.
- Date of payment
- Pay period covered by the payment
- Exempt or non-exempt status
- Hourly or salaried pay status
Use this checklist when creating your template for payroll records to ensure that you have the required information in every payroll file. This will also help you ensure that you have standardized payroll records for every employee.
Your business is required by law to keep payroll records for a certain number of years. How long you need to keep records depends on the laws pertaining to that type of documentation.
The FLSA requires that businesses keep payroll records for at least 3 years. In addition to official payroll records, you must also keep any documentation that verifies how you determined an employee’s wages for at least 2 years. And don’t forget about documentation for employment taxes, also known as payroll taxes. The IRS requires you to keep these records for at least 4 years.
Retention requirements for the different types of payroll document
- 2 years: Any documentation used to calculate total wages should be kept for 2 years. This includes time cards, work and time schedules, wage rate tables, job evaluations, etc.
- 3 years: Payroll records should be kept 3 years, including paystubs, payroll advance records, etc.
- 4 years: Employment tax documentation includes Form W-4, W-2s, records detailing fringe benefits, tip allocation, sick pay, etc.
Once you fulfill the required retention timeline, you should dispose of payroll records. But that doesn’t mean you simply throw them away. Since highly sensitive information is kept within payroll files, it is important to properly dispose of them.
As with all other human resources records, payroll records should be thoroughly shredded and discarded in a secure location if they are paper documents. For digital files, permanently delete the file.
While payroll records have been traditionally stored in filing cabinets, businesses are increasingly going digital with their payroll files. When storing payroll records digitally, it’s essential that you use a secure solution to prevent this sensitive data from landing in the wrong hands.
Storing payroll records is a lot of responsibility, and should be done carefully. To help you stay organized and keep this information secure, here are some tips for storing payroll files:
- Use a standardized template for all payroll records
- Keep all of your payroll files in the same place
- Use a cloud-based storage solution as opposed to documents or spreadsheets stored on your computer
- Invest in payroll software with HR services for your small business to help with accuracy and organization
- Ensure that payroll files are up-to-date for every employee and immediately input this information wherever it will be stored
For help managing and keeping track of your payroll records, QuickBooks payroll services can also be a helpful tool. With QuickBooks, you can automate the majority of the payroll process, generate payroll reports instantly, and rest assured that your data is safe.
Certified payroll records detail employees’ earnings, benefits, and hours worked on government projects. Certified payroll records need to be kept between 2 to 4 years, depending on the specific type of documentation. For example, payroll sheets need to be kept for 4 years, while time and attendance cards only need to be kept for 2 years.
In accordance with EEOC regulations, payroll records must be kept for at least one year—this includes terminated individuals. However, the FLSA requires that you keep payroll records for all employees for three years following the date of their termination.
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