Rules for Retaining Different Types of Payroll Records
State Laws and Regulations – State payroll records retention requirements vary. Generally, you can destroy any payroll record containing other people’s information if you do not have a retention requirement of your own. However, consult with a qualified payroll professional.
Federal and State Retention Requirements – Federal and state payroll records retention requirements vary. Generally, if you have a retention requirement for your records, delete or destroy records older than your retention period unless your records bear on the subject matter of a pending judicial or administrative proceeding in which the records are relevant.
Unsupported Employee Liability Disclosures – Some jurisdictions allow extended retention time for payroll records that are used to support the employee’s claim of having insufficient funds to pay a claim.
Worker’s Compensation Forms – Worker’s Compensation forms must be retained for 3 years regardless of your payroll records retention period.
Payroll Record Retention Best Practice—What to Keep & For How Long
Keeping payroll records is not only important when conducting payroll but is essential to maintain strong internal controls for your organization. When evaluating your record retention policy, it’s important to consider these best practices:
If you’re in the process of changing payroll recordkeeping systems, you need to start the process now. It’s a common mistake for new payroll recordkeepers to roll out a policy, sample of payroll records, and then wait for the new system to be implemented. This is a massive mistake that can result in your terminating records well before the new system is implemented.
Your human resources department needs to be involved from the beginning. Request support from your human resources department to update the policy and to develop a sample of payroll records. Include a description of why you need the record and a sample of payroll records to ensure that the human resources team understands what you want.
Update and expand your sample policy and, if necessary, your current policy. Obviously, payroll records are more important than medical records or other records. Update your policies accordingly.
State-Specific Laws About Retaining Payroll Records
Some states require you to keep payroll records for a certain amount of time past the last date of employment, while other states say payroll records are to be kept for three years after the last date of employment.
Below is a list of states that have this requirement:
- New York
- North Carolina
- South Carolina
- West Virginia
- keep copies of a pay stubs for a minimum of two years from the date of the last payment in the state of New York
- keep copies of employee pay and tax records for a minimum of one year from the date of the last payment
- keep payroll records on a daily basis for a minimum of one year from the date of the last payment
- keep copies of an employee’s pay register for a minimum of one year from the date of the last payment [Amended]
- keep copies of all employees’ pay records for three years after their last date of employment or filing a claim for unemployment benefits
- keep copies of pay records of all employees for a minimum of two years after the date of the last payment
Types of Payroll Records NOT to Keep
This may come as a surprise to you, but there are two things you shouldn’t keep on your payroll records. The first is timesheets. Your office might provide timesheets and the law says they’re a must. However, your company and clients can’t afford the time you’re going to spend filling them out. Plus, you’re going to come under criticism if something goes wrong because you didn’t follow the law.
The second thing you shouldn’t keep is production reports. We’ve already talked about the fact that you can’t keep track of the hours your employees work without their consent. You might think you’re doing your workers a big favor by keeping these reports. The fact is, you’re not. If you’re going to require a production report, you should also require an hourly report that employees can give you on their own accord.
Important Information on Each Type of Payroll Record
Every organization keeps different types of payroll records:
Employee Payroll Records – Employer payroll records for each employee including taxes.
W-2 Records – These provide a detailed record of income and taxes for each employee.
1099 Records – These are used to accurately report the other income paid to contractors, direct sellers, and other types of independent contractors.
A-D Records – These show the amount and date of each check to each employee or contractor. They show payments in full or partial but do not show the details of the employee’s pay.
W-3 Records – These show the details of the net value of the benefits.
Profit & Loss Records – In many cases, an employee’s check will be included in these records.
Reports for Each Type of Payroll Record
Employee Payroll Record – W-2: Employee's and Employer's Copy of Wages, Federal – State (1099) & Social Security (W-2), Social Security and Medicare Tax Withheld (Forms W-2 (PR), (W2-SS), W-2c, W-3, W-3c, and W-4
1099 Record – Form 1099-MISC: Miscellaneous Income
How to Store Payroll Records
Keeping payroll records is so important. They’re essential for following employment tax rules. They make it easy to track the money you’ve earned and make sure you don’t get in trouble with the IRS.
So regardless of your tax strategy and even though you may perform all of your bookkeeping manually, someone with payroll responsibilities should always have a payroll register.
Below are some of the options available for keeping payroll records:
Electronic Records – Electronic payroll registers make it easy to keep track of employee earnings through an online and stored summary. However, they’re more expensive and difficult to maintain; you have to go online frequently to update information, and the electronic records may become obsolete if your system breaks.
Electronic payroll registers make it easy to keep track of employee earnings through an online and stored summary. However, they’re more expensive and difficult to maintain; you have to go online frequently to update information, and the electronic records may become obsolete if your system breaks. Paper Records – Records kept on paper are easy to implement, less expensive, and generally easier to maintain. They’re preferable for small organizations, but they do require some extra work – you have to keep them updated regularly and make sure you save them for the tax records and audit defense.
Store Required Payroll Information on Paper Documents Off-site
It’s important to keep payroll information safe. Employees have the right to know their net pay, the payroll records that you need to produce, and their tax withholdings. It’s important to keep this information somewhere secure.
It’s a good idea to keep paper copies of your payroll records in a fireproof safe or safety deposit box. Yes, paper records are going to wear and tear over time, but in the long run, they provide an organized record of your employees’ payroll.
By creating a paper record and keeping it somewhere secure, you can prove to your workers that they’re getting paid correctly.
Store Required Payroll Information Electronically
It’s important to maintain payroll records because government tax authorities require that you keep one. But while you do need to maintain payroll records, the information they provide is not always accurate.
In fact, studies indicate that keeping individual employee payroll records can be a waste of time. In some companies, double entries of hourly paychecks (every hour the employee works on the clock) can lead to mistakes and errors when the employees are paid. And this is just one of the many mistakes that can arise due to a lack of payroll records.
So keep this in mind and opt to store electronic records from your employees. But what should you store and at what time frame?
The IRS doesn’t require you to keep payroll records for more than five years, so keep your pay records for a shorter time than that. And when it comes to payroll, the IRS has specific criteria you need to maintain on a regular basis.
- Correct record keeping: Payroll records should detail the hours worked, deductions or withholdings (based on the number of hours worked), and the wages earned.
- Tax forms: You should maintain pay records with your tax forms including your Schedule C (used with Schedule C), W-2, W-2G, 1099-INT, and 1099-DIV.
Who Determines What Payroll Information to Keep
The payroll records that you create are meant to keep track of how much you pay your employees and how much they earn; in some cases, they can also help you track what deductions were made to pay the payroll tax. However, just keeping these records on file for three years, as required by the Internal Revenue Service, might not be enough.
While the federal mandate is that you keep payroll records for no longer than three years, many states have laws that dictate how long you need to keep payroll records for tax purposes. If you’re unsure how much information to keep, you might find it useful to consult with a tax professional to find out how long you should keep that information.
For those of you who are keeping track, we’ll day-by-day show you what information should be kept, how it should be kept, and what the checklists look like.
A very very brief explanation: When payroll is done, the payroll department compiles all the information from the company's payroll software and a spreadsheet. There is a form similar to a W-2, but more detailed which the employees have to fill. This form is called a 1099-MISC and is one that the recipient can file and claim the earnings at tax time. When you pay your employees, you're supposed to send out a copy of this 1099-MISC.
How to Destroy Payroll Documents
Employers are required to keep payroll records of employees for at least seven years following the year the compensation was paid. While this can seem like a long time, being able to go back to these records will come in handy for an employer in various circumstances.
Usually, all of these circumstances include compliance investigations, audits, or litigation. However, there are also certain cases where records may be needed six or five years after the compensation was paid, as they may be needed to prove certain key points.
Certain records, such as employee evaluations, are best left within the past two years. Often, they may become outdated and are not as relevant to their effectiveness.
While employers can legally destroy documents after keeping them for the required period, it is advisable that they do not destroy these records before that time.
It is also crucial to make sure that you keep all records, including emails, all in case you need to go back in time to look at them.
Other Documentation Retention Considerations
Retain copies of W-2s, 1099s and other tax documents you receive.
Keep account documents for five years.
Store essential payroll records (benefits statements, pay stubs and other key information) in the same place for five years.
Keep records for five years and older at the time of last statement.
Keep paper copies of your check register and bank statements at two-year intervals.
Retain any records of other pay-related issues such as payroll errors for at least two years.
Constantly monitor payroll records for signs of potential errors.
Keep copies of employee handbook, policies, and other company documents in an archive.
Set up a paperless archive for payroll records, and store data electronically.
If you are a service provider to a third party, keep copies of all records related to your work for at least two years.
If you are a government contractor, you must maintain the records indefinitely.
If you are an independent contractor, always remember that you and your business remain responsible for payment of taxes.
Before you start a job, make sure you understand the recordkeeping requirements and find out your responsibilities.
When you are finished the job, always make sure you get all the necessary paperwork. Always check with the customer on how and where to send it.
The Bottom Line
Payroll records are some of the most important business documents needed by your company. Yet the same documents are also among the most poorly kept. Many failing companies find themselves in deep financial trouble because they don’t maintain their payroll records.
Keeping accurate and complete payroll records will help you understand what’s going on in your company, make better financial decisions, dismiss unnecessary expenses, and decrease liability. In turn, this will increase productivity and efficiency in your company.
This article looks at the different portions of payroll records and what you need to keep and how long you need to keep it. Before we start, it’s extremely important to make sure the payroll system is complete and accurate. In order to do that, you need payroll software that fully meets your business’s needs.