How Long Do You Have to Keep Payroll Records in California?

Payroll records are essential for businesses, providing a comprehensive history of employee compensation and related financial activities. Maintaining accurate and accessible payroll records is a necessity for legal compliance and can be crucial during audits or disputes. Their proper management helps ensure transparency and accountability in financial operations.

Federal Requirements for Payroll Records

Federal agencies establish specific guidelines for how long businesses must retain payroll records.

The Internal Revenue Service (IRS) requires employers to keep all records related to employment taxes for at least four years after the tax becomes due or is paid, whichever is later. This includes documents such as Forms 941, 940, W-2, and W-4, along with records of tax payments. These records are essential for verifying compliance with federal tax obligations during IRS reviews.

The Department of Labor (DOL) also sets retention periods under the Fair Labor Standards Act (FLSA). Under the FLSA, employers must retain payroll records for a minimum of three years. This includes information such as employee’s name, social security number, address, date of birth (if under 19), sex, occupation, workweek details, hours worked, wage payment basis, pay rates, earnings, additions/deductions, total wages paid, payment date, and the pay period covered. Records used for wage computations, such as time cards and work schedules, must be kept for two years.

Other federal laws also impose recordkeeping requirements. The Equal Employment Opportunity Commission (EEOC), which enforces acts like the Americans with Disabilities Act (ADA) and the Age Discrimination in Employment Act (ADEA), requires employers to keep employment-related records for one year. Under the ADEA, payroll and other records relating to an employee’s name, address, date of birth, occupation, rate of pay, and compensation earned each week must be retained for at least three years. Records related to hiring, promotion, demotion, transfer, training, layoff, recall, or discharge should be kept for one year.

California Requirements for Payroll Records

California state law often mandates longer record retention periods than federal requirements, reflecting its comprehensive labor protections.

The California Labor Code requires employers to keep payroll records for at least three years, including details on hours worked and wages paid. These records must be maintained at a central location within the state or at the employee’s place of employment and be accessible for inspection by the Division of Labor Standards Enforcement (DLSE).

Wage statements, or pay stubs, are addressed under California Labor Code Section 226, requiring employers to retain copies for at least three years. Due to the statute of limitations for wage claims extending up to four years under the Unfair Competition Law, many employers keep these records for four years for added legal protection. Employee time records, crucial in wage and hour lawsuits, should also be maintained for at least four years.

Personnel files, containing documents relating to an employee’s performance or grievances, must also be retained. California Government Code Section 12946 requires employers to keep personnel files for a minimum of four years after creation or an employment action, such as termination. This period aligns with the state’s longer statute of limitations for certain employment-related claims. The California Employment Development Department (EDD) also requires employers to maintain records for at least eight years for employment tax audits, covering all workers and payments, including independent contractors.

Maintaining and Accessing Payroll Records

Effective management of payroll records involves understanding the specific types of documents and their consolidated retention periods, which are determined by the longest applicable federal or state requirement.

For most general payroll records, such as employee earnings records and payroll registers, a retention period of four years is advisable due to IRS requirements for employment taxes and California’s extended statutes of limitations. Time cards and other records used to calculate wages should be kept for at least four years, reconciling federal and state requirements. Tax forms like W-2s, W-4s, and Forms 940 and 941 must be retained for four years. Form I-9, Employment Eligibility Verification, must be kept for three years after the date of hire or one year after termination, whichever is later. Personnel files, including applications and performance reviews, should be retained for at least four years, in line with California’s requirements.

Records can be stored in various formats, including physical paper or electronic systems. Regardless of the method, security, backup, and data integrity are essential. Digital storage offers advantages like reduced physical space and easier retrieval, but requires robust cybersecurity measures such as password protection and encryption to protect sensitive employee data. Regular backups are essential to prevent data loss.

Payroll records must remain accessible for inspection by employees and regulatory agencies, even after an employee has left the company. California law grants current and former employees the right to inspect and receive copies of their payroll records. Employers must provide these records within 21 calendar days of a request to avoid potential penalties. Maintaining an organized and secure record-keeping system ensures compliance and facilitates quick retrieval for audits, legal proceedings, or employee requests.