Are Employers Required to Keep Copies of W-2?

Employers are legally required to maintain employment tax records to substantiate the information reported on tax filings. Failing to keep proper documentation can lead to issues if tax authorities question the accuracy of filed returns. This responsibility includes specific forms and supporting data that verify wages paid and taxes withheld.

Federal Requirements for W-2 Retention

Federal law from the Internal Revenue Service (IRS) dictates that employers must keep employment tax records for at least four years. This period begins after the tax’s due date for that return period or the date the tax is paid, whichever is later. This retention requirement applies to more than just the employer’s copy of Form W-2, Wage and Tax Statement, and ensures businesses can produce documentation during an audit.

The obligation extends to supporting documents that validate the figures on the W-2. Required records include:

• Form W-3, Transmittal of Wage and Tax Statements
• Employee information such as names, addresses, and Social Security numbers
• Dates of employment and the amounts and dates of all wage payments
• Copies of employees’ Form W-4, Employee’s Withholding Certificate

Any employee copies of Form W-2 that are returned to the employer as undeliverable must also be kept for the four-year period. The ability to produce these records is necessary for verifying the accuracy of tax deposits and returns. For instance, if the IRS questions the amount of federal income tax withheld, the employer must provide the W-4 and payroll records to substantiate the amount on the W-2.

State-Level Record-Keeping Obligations

The four-year federal retention period is only a baseline, as individual states impose their own record-keeping requirements. State-level rules can be more stringent and may require employers to hold payroll and tax documents for a longer duration. Businesses must be compliant with the laws in every state where they have employees.

Retention periods differ from one state to another; for example, some states require employers to keep payroll records for six or seven years. These requirements are enforced by the state’s department of revenue or labor. The types of records required often mirror federal rules but can include additional state-specific forms.

Businesses must identify and comply with the longest applicable retention period, whether federal or state, to ensure full compliance. An employer operating in multiple states must navigate the specific requirements for each jurisdiction. Relying solely on the four-year federal rule can expose a business to legal and financial risk in states with longer retention mandates.

Consequences of Non-Compliance

Failing to maintain and produce required records like Form W-2 and its supporting documentation can lead to penalties. These issues commonly arise during an audit by the IRS or a state tax agency. If an employer cannot substantiate the figures on its tax returns, the agency may reconstruct the income and tax liabilities in a manner that is unfavorable to the business.

The IRS can impose penalties for record-keeping failures, such as a failure-to-pay penalty or an accuracy-related penalty under Internal Revenue Code Section 6662. These are assessed if the lack of records leads to an underpayment of tax. The accuracy-related penalty can be 20% of the underpayment amount that is due to negligence or a substantial understatement of income tax.

Poor record-keeping also creates administrative burdens. Responding to an audit without proper documentation is a time-consuming process that can involve trying to recreate records from other sources. These recreated records may not be accepted by the auditing agency. Adhering to retention schedules is a key part of tax compliance and risk management.