What Is a Payroll Record & What Does It Include?

A payroll record details an employee’s compensation, hours worked, and deductions. These records are key for business operations, providing a clear account of transactions related to employee pay. They are a foundational element for internal financial management and external regulatory compliance, supporting transparency and accuracy.

Information Included in Payroll Records

Payroll records contain employee identification details. This includes the employee’s full legal name, current address, Social Security number, and date of birth. Records also note their occupation, original hire date, and if applicable, their termination date.

Compensation details include the employee’s regular pay rate and overtime rates. Records also account for supplementary earnings such as commissions, bonuses, and reported tips, which contribute to gross wages. Specific payment dates for each pay period are documented.

Records track hours worked, especially for non-exempt employees eligible for overtime pay. This includes daily and weekly hours, start/end times for shifts, and meal periods. Accurate tracking of hours is important for compliance with federal labor laws regarding minimum wage and overtime.

Deductions detail amounts withheld from an employee’s gross pay. This includes federal, state, and local income tax withholdings. Federal Insurance Contributions Act (FICA) taxes include Social Security and Medicare. Social Security is 6.2% of wages up to an annual limit, and Medicare is 1.45% of all wages, with employers matching these amounts. Additional deductions cover health insurance premiums, retirement plan contributions, and wage garnishments.

Payroll records also detail employer contributions to benefits and taxes. This includes federal unemployment tax (FUTA) and state unemployment tax (SUTA). FUTA is 6% on the first $7,000 of an employee’s wages, though most employers receive a credit that reduces the effective rate to 0.6%. Employer contributions to health or retirement accounts are also recorded.

Why Payroll Records are Important

Payroll records ensure legal compliance across regulatory frameworks. These documents demonstrate adherence to federal laws like the Fair Labor Standards Act (FLSA) and the Internal Revenue Code (IRC). They also confirm compliance with the Social Security Act, state, and local labor and tax regulations. Businesses rely on these records to prove compliance during audits or inspections by agencies like the Internal Revenue Service (IRS) or the Department of Labor.

Payroll records are used for accurate tax reporting to federal, state, and local authorities. They provide data for preparing and filing tax forms, including quarterly federal tax returns like Form 941. Payroll records also generate annual Wage and Tax Statements (Form W-2) for employees and Form W-3 to the Social Security Administration.

Payroll records support financial accuracy and budgeting. Detailed information on wages, taxes, and benefits allows for financial statements, essential for assessing profitability and health. These records facilitate cost analysis of labor expenses, enabling forecasting of future payroll costs and informed budgeting decisions.

Payroll records are important for dispute resolution. If a wage dispute arises with an employee concerning hours worked or compensation, these records provide an objective account. They are also important for supporting or contesting unemployment claims, as they document employment dates and earnings history. In workers’ compensation cases, accurate payroll data is necessary to determine average weekly wages and benefit calculations.

Payroll records are important for administering employee benefits. They provide data to calculate and manage contributions to retirement plans, such as 401(k)s, and health insurance programs. This ensures employee benefits are correctly administered and employers fulfill their obligations. Record-keeping supports the operation of these employee programs.

How Long to Keep Payroll Records

Federal regulations set retention periods for payroll records. The Fair Labor Standards Act (FLSA) requires employers to keep payroll records, including employee names, addresses, occupations, pay rates, hours, and wages, for at least three years. Supplementary records, such as time cards and work schedules, must be retained for two years. These requirements ensure federal agencies can verify compliance with wage and hour laws.

The Internal Revenue Service (IRS) requires retention periods for employment tax records. Businesses must keep records related to employment taxes for at least four years after the tax becomes due or is paid, whichever is later. This includes records for federal income tax withholding, Social Security and Medicare taxes, and federal unemployment taxes. These records substantiate information reported on tax returns and aid in responding to IRS inquiries or audits.

Other federal agencies, such as the Equal Employment Opportunity Commission (EEOC), have recordkeeping requirements for payroll documentation. The EEOC requires employers to keep personnel/employment records for one year from the date of creation or the personnel action involved. For records under the Age Discrimination in Employment Act (ADEA), payroll records must be kept for three years. Businesses should consider applicable federal requirements when establishing retention policies.

State and local laws often impose longer retention periods for payroll records than federal laws. Some states may require payroll records to be kept for five or even seven years. Businesses must always comply with the longest retention period, whether federal, state, or local. Consulting state labor and tax department guidelines is necessary for compliance.

Businesses have flexibility in record retention methods. Payroll records can be kept in paper or electronically, if accurate, legible, and accessible. Electronic records must maintain integrity and be reproducible. The chosen method should allow easy retrieval and ensure records remain unaltered throughout the required retention period.