As a US based retailer, you already have to manage high turnover and the challenges that come with running payroll for hourly or minimum wage workers. But, you may not be aware of the payroll records you need to retain to comply with federal, state and local laws. As an employer, you need to keep records to document your business’ claims and filings with federal and state labor and revenue departments, local tax centers and any other organizations that require reporting and payment as part of your payroll process.
Why so many forms and government entities? It’s a function of two primary factors: payroll taxes and employment laws.*
In this post, we’ll go over:
- Record retention guidelines for taxes
- Record retention guidelines for labor laws
- Important record types to retain
- Frequently asked questions
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Payroll record retention guidelines for payroll taxes
The need to keep accurate payroll records is largely the result of payroll taxes. These are also known as employment taxes, which include federal and state income tax, federal and state unemployment insurance, Federal Insurance Contributions Act (FICA) taxes (Medicare and social security) and local payroll taxes.
IRS recordkeeping requirements for payroll taxes
According to the Internal Revenue Service (IRS), an employer must retain payroll records relating to payroll taxes a minimum of four years from the time the taxes are due, or from the date on which you made the payment (whichever is later). Ideally, this is also long enough to cover the period in which an employee could file an amendment (change) for the applicable fiscal year.
Payroll tax records an employer should retain include:
- Employer identification number (EIN)
- Employer tax forms (reports) and payment (deposit) receipts
- IRS notifications regarding payroll taxes, including the employer’s remittance frequency status.
- Amounts of tips reported for businesses with tipped employees
- Amounts and dates of all taxable wage, annuity and pension payments (including bonuses and commissions).
- Employee information, like addresses, social security numbers (SSNs), occupations, dates of employment and tax documents (W-4s and W-2s)
State and local recordkeeping requirements for payroll taxes
While the four-year mark applies at the federal level, it doesn’t account for varying state and local requirements, including statutes of limitations. For tax purposes, state requirements range from three to as long as eight years. Check your state and local record retention laws to confirm your requirements so you can set up an accurate record retention schedule.
In a perfect world…
Since different agencies have different requirements, the sensible thing to do is make a judgment call based upon all federal, state and local laws that apply to your business. As guideposts, the Small Business Administration (SBA) recommends keeping payroll records for up to six years and legal advice site, Nolo, suggests a payroll record retention period of up to seven years.
Payroll record retention guidelines for labor laws
You need to keep good payroll records to prove that you’re complying with federal, state and local employment standards. For instance, Fair Labor Standards Act (FLSA) regulations cover minimum wage, overtime and youth employment standards. State and local authorities also have specific labor regulations and practices that need to be followed. In all of these instances, your payroll records are your proof of compliance.
The Department of Labor (DOL) outlines its recordkeeping requirements in a document titled the FLSA Fact Sheet #21, which states that employers must keep the following documents for any non-exempt worker (someone who qualifies for overtime under FLSA and/or state and local laws):
- Every employee’s full, legal name, social security number (SSN) and address information, including Zip Code (Date of birth is required for employees younger than 19)
- Sex and occupation (job title and duties)
- Time and day of week when each employee’s work week starts
- The total number of hours worked each day and each week
- Payment agreement/status (hourly, salary, full-time, part-time, etc.)
- Rate of pay
- Total daily and weekly regular and overtime earnings
- All payroll additions and deductions
- Total wages paid each pay period
- Date of payment and the pay period covered by the payment
How long does FLSA require you to keep payroll records?
FLSA requirements state that payroll records should be kept a minimum of three (3) years. However, supplemental information, such as time cards or rate tables, only need to be kept for two (2) years.
State and local labor law recordkeeping requirements
Like the regulations for payroll taxes, state and local requirements vary and it’s best to verify the payroll record retention requirements for your business.
Other labor laws that affect payroll record retention
Keep the following:
- Form I-9s (employment eligibility verification) at least three (3) years
- Occupational Safety and Health Act (OSHA) documentation at least five (5) years (for businesses with more than 10 employees)
- Retirement plan records at least six (6) years
- Items related to the Americans with Disabilities Act (ADA) for up to one (1) year (for businesses with more than 15 employees)
- Proof of equal opportunity employment practices up to three (3) years and family medical leave (FMLA leave) records up to three (3) years
Again, these are federal requirements. Additional state and local rules may also apply.
Payroll records that contain tax and labor law information
As they regulate the workplace as well as how employees are paid, payroll tax and labor laws are connected, which is why the main tax and compliance documents below contain information that applies to both.
W-4s (Employee’s Withholding Allowance Certificate)
Completed by the employee upon being hired, they contain the employee’s full name, address, SSN and tax allowances.
W-2s (Employee’s Wage and Tax Statement)
Completed by the employer as part of payroll year-end, W-2s are the reporting tool that contain the employee’s key identifying information as well as all the tax withholdings and taxable income amounts needed for the employee to file their individual income tax returns. (Note: Due to the tax implications, the IRS is the key regulatory agency for W-4s and W-2s.)
Form 941 (Employer’s Quarterly Tax Form)
Completed by the employer on a quarterly basis it shows all the payroll tax amounts withheld from employees and contributed by employers. This form also includes information on tipped wages.
Form 940 (Employer’s Annual Federal Unemployment Tax Return)
The annual tax return is completed to indicate how much federal unemployment tax the employer has paid.
Wage detail reports
Submitted quarterly by employers to state unemployment and other tax authorities.
New hire reports
Submitted at a state level by the employer, within a set number of days after hiring or rehiring an employee.
While the FLSA only requires recordkeeping, it doesn’t require that employers issue pay stubs or a similar payroll document. However, an accurate pay stub will contain all of the above information, and more than half of the states (26) require that employers issue pay stubs.
Business processes that also generate payroll records
Whether you use a spreadsheet to track employee wages, or payroll software, whenever you run payroll you will enter items, like the rate of pay, number of hours worked, overtime earnings, etc. to complete this task. Once you’ve paid your employees, these documents become your records. Reports can then be generated for specific pay runs or as summaries of several payroll cycles over a set period of time.
As part of your recruiting and hiring process, offer letters and other onboarding items also contain employment information, like job titles and compensation.
Frequently asked questions
What happens if you don’t keep the right payroll tax records?
It will cost you time, money and a lot of stress. The simple answer is that you won’t be able to adequately defend yourself against any audits, penalties or similar actions. Without the proper information, you will also be unable to substantiate any claims you’ve made on your behalf, such as tax deductions or proof of compliance with any specific tax or labor regulation.
And, when it comes to payroll, time and again, the responsibility falls back to the employer (business owner). Even if you’re working with an accountant or bookkeeper and using payroll and accounting software, the precedent has shown that the responsibility for complying with payroll tax and labor laws ultimately lies with the employer. In extreme cases, depending on the issue, the IRS can even seize an employer’s personal assets and press criminal charges.
Paper or digital records?
This, my friends, is the paper or plastic of the recordkeeping world. FLSA guidelines don’t specify a format.
However, as the world gets more and more digital, the ability to attach a document and hit send has its benefits. Digital files also tend to take up less space, unless you really, really like file cabinets. At the end of the day, the best system for your retail business is the one that ensures accuracy and simplifies the record keeping process.
What are my responsibilities for protecting private employee and business information?
As payroll records contain sensitive employee and business information, you have to ensure the safety and integrity of this information. To learn more about the measures you can take, see the Federal Trade Commission’s (FTC) Business Guide for Protecting Personal Information.
Where can I learn more about labor and tax laws?
Small business payroll provider Wagepoint has created an interactive payroll tax map that provides state-by-state payroll tax and labor law information and an expert guide on US payroll taxes with an infographic that shows the impact these taxes have on small businesses. These resources are available free of charge and commitment to anyone wanting to learn more about these topics.
Want to move more of your business operations from paper to digital? Talk to a Lightspeed expert to learn more about how our POS system can help.
*The focus of this article is workers who are classified as exempt employees for which the employer is responsible for following labor laws and administering payroll taxes. (Contractors pay their own payroll taxes and are therefore subject to their own recordkeeping regulations.)