What Are Payroll Records & What Should You Keep?
Master the essentials of payroll records: understand their vital role, what to keep for compliance, and best practices for retention.
Payroll records are the comprehensive documentation of an employer’s financial interactions with their employees. These records serve as a detailed account of all compensation, deductions, and related information for each individual on the payroll.
Essential Information in Payroll Records
Payroll records encompass specific data points for each employee, including personal identifying information such as full name, home address, and Social Security number.
Employment details are also important, including occupation, sex, and the date their workweek begins. Records must reflect hours worked each day and total hours worked per workweek, particularly for non-exempt employees. The basis on which wages are paid, whether hourly, weekly, or by piecework, along with the regular hourly pay rate, must be documented.
Gross wages, deductions, and net pay are core components. Deductions include federal and state income tax, Social Security and Medicare taxes (FICA), health insurance premiums, retirement plan contributions, and any garnishments or voluntary deductions. The specific payment dates for each pay period are also recorded.
Importance of Maintaining Payroll Records
Maintaining accurate payroll records is essential for employers. These records ensure compliance with federal, state, and local employment and taxation laws. Proper record-keeping allows businesses to adhere to wage and hour laws, such as minimum wage and overtime regulations.
Payroll records support accurate financial reporting and provide data for preparing and filing employment tax returns, such as Forms W-2, W-3, W-4, and the quarterly Form 941. This documentation helps prevent penalties during tax audits or regulatory reviews. These records are also essential for resolving disputes with employees regarding wages, hours worked, or deductions.
Required Retention Periods
Employers must retain payroll records for specific durations, which vary by governing agency and record type. Federal agencies like the Internal Revenue Service (IRS), the Department of Labor (DOL) under the Fair Labor Standards Act (FLSA), and the Employee Retirement Income Security Act (ERISA) set these requirements. The IRS requires employers to keep employment tax records, including Forms W-2, W-4, and 941, for at least four years after the tax becomes due or is paid, whichever is later.
Under the FLSA, payroll records, collective bargaining agreements, and sales and purchase records must be preserved for at least three years. Records used to calculate wages, such as time cards, wage rate tables, and work schedules, must be kept for at least two years. For employee benefit plans covered by ERISA, records supporting plan disclosures and annual reporting (like Form 5500) must be retained for at least six years from the filing date.
Methods for Keeping Records
Employers have several options for storing payroll records, including traditional paper-based systems and digital solutions. Paper records require physical storage, such as secure filing cabinets and organized archives.
Digital storage offers accessibility, searchability, and space efficiency. Many businesses use specialized payroll software, cloud-based platforms, or electronic document management systems. Security is important, requiring encryption, access controls, and regular backup procedures to protect sensitive employee data.