How Long Do You Keep Payroll Records for the IRS?

Maintaining complete and accurate payroll records is a responsibility for any business with employees. Government agencies mandate these records to ensure compliance with tax and labor laws. Proper recordkeeping demonstrates correct wage payment, tax withholding, and adherence to employment regulations, which are part of a company’s legal and financial obligations.

Required Payroll Records to Retain

Basic employee information includes each employee’s full name, Social Security number, and address. This also involves maintaining copies of hiring forms, such as the employee’s Form W-4 for federal income tax withholding, and Form I-9, which verifies their eligibility to work in the United States.

For non-exempt employees, you must keep precise records of the hours worked each day and the total hours for each workweek. You must also document the basis on which wages are paid, such as the hourly rate or weekly salary, and any overtime earnings. These records substantiate the calculation of total wages paid to an employee.

Records of all payments and deductions are also required. This includes copies of pay stubs or direct deposit statements that show the gross pay, all itemized deductions, and the net pay. Clear documentation is needed for all additions to or deductions from an employee’s wages, from health insurance premiums to court-ordered wage garnishments.

Employers must retain copies of all employment tax filings and records of their tax deposits. This includes quarterly filings like Form 941, Employer’s QUARTERLY Federal Tax Return, and annual filings like Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return. You should also keep copies of Form W-2s and the corresponding Form W-3 transmittal summary.

Federal Retention Timelines

Multiple federal agencies establish timelines for how long payroll records must be kept, and the periods can differ based on the specific record and governing law. The overlapping nature of these rules means a single document might be subject to more than one timeline.

The Internal Revenue Service (IRS) requires employers to keep records related to employment taxes for at least four years after the tax was due or paid, whichever is later. This rule applies to records for Social Security, Medicare, federal unemployment taxes, and federal income tax withholding. A six-year retention period applies to records for certain COVID-19 tax credits, including documentation for qualified leave wages taken after March 31, 2021, and for Employee Retention Credit claims for wage periods after June 30, 2021.

The U.S. Department of Labor (DOL) enforces the Fair Labor Standards Act (FLSA), which sets its own retention rules. The FLSA requires employers to keep payroll records, such as employee names, addresses, and pay rates, for at least three years. This three-year rule also applies to collective bargaining agreements. Documents that form the basis for wage computations, like time cards and work schedules, must be kept for two years.

Other federal laws also impose recordkeeping obligations. The Age Discrimination in Employment Act (ADEA) requires employers to keep payroll records for three years. Regulations under the Americans with Disabilities Act (ADA) and Title VII of the Civil Rights Act require employment records to be kept for at least one year from the date of the record or personnel action. If a charge of discrimination is filed, all relevant records must be preserved until the final disposition of the case.

State-Level Retention Requirements

Beyond federal mandates, employers must follow state-specific laws governing payroll record retention. State departments of labor and revenue have their own rules that can differ from federal requirements and may demand longer retention periods.

Employers must adhere to the longest applicable retention period. If a federal law requires a record to be kept for three years, but a state law requires the same record to be kept for five years, the employer must follow the five-year state requirement.

This variance is important for businesses that operate in multiple locations. The definition of a payroll record and the required retention timeline can change from one state to another. Employers should consult their state’s labor and revenue agencies to obtain current information.

Compliant Storage and Disposal of Records

Properly managing payroll records extends beyond retention timelines to include how they are stored and destroyed. Both the IRS and the DOL permit employers to maintain records in electronic formats. The system must ensure the records are accurate, complete, and can be produced in a readable format if requested.

Whether records are stored physically or digitally, security is a primary concern. These documents contain sensitive personal information, so employers must implement security measures, such as encryption for digital files and locked storage for physical documents, to protect employee privacy and prevent unauthorized access.

Once the longest required retention period has passed, records require secure disposal. For paper documents, cross-cut shredding is recommended to ensure the information is irretrievable. For electronic records, secure digital wiping or destruction methods should be used. Documenting the disposal process can also provide a record of compliance.