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The IRS requires that employers must keep payroll records for a certain period of time. However, holding on to old documents can be problematic in the event of an audit and should only be kept as long as it’s necessary.
Payroll records are papers that include any information concerning a company’s payroll, such as employee details, pay stubs, and taxes. Payroll records should be kept for three years, and payroll tax records, such as unemployment taxes, should be kept for four years, according to federal law. States like New York, as well as legislation like the Employee Retirement Income Security Act (ERISA), which governs private retirement and health plans, require you to preserve certain documents for six years.
If you don’t want to bother about payroll records, HR software such as Bambee can save them electronically. For only $99 per month, you can use its HR professionals to design compliance rules and encourage your workers to e-sign all of their key employee papers using secure technology.
Retaining Different Types of Payroll Records: Rules and Best Practices
Though most papers are only needed to be kept for three to four years, we’ve compiled what we think to be best practices for payroll data preservation, taking into account both federal and state standards.
Job applications and interview records must be retained for one year, while payroll paperwork must be preserved for three years after an applicant has been employed. Employment tax records such as W-4s, which must be retained for four years, and retirement income documents, which must be kept for six years, are the only exceptions.
Employers should maintain copies of all hiring documentation, such as time cards, pay stubs, and pay registers, as well as any hiring records that contain the employee’s complete name, address, and Social Security number.
Tip: If you have a termination disagreement with an employee, it’s a good idea to save all payroll paperwork until the issue is resolved.
State-Specific Payroll Records Retention Laws
Most states follow the U.S. Department of Labor’s (DOL) and other federal agencies’ payroll document preservation rules. A few states, including New York, California, Illinois, and Washington, have established laws governing what payroll data to preserve and for how long. Here are the particular regulations for those states, along with links to further information.
The Wage Theft Prevention Act extends the time that payroll records must be kept from the DOL’s three years to six years.
Payroll records must be kept for four years, or eight years if the workers are exempt.
In terms of keeping payroll records for three years, the Department of Labor and Industries is similar to the DOL; however, the standards for what to keep are more detailed. Each non-compliance infringement carries a penalty of $250.
Each kind of payroll record has important information on it.
Many agencies have unique payroll compliance standards for the sorts of data that should be included in each payroll record, and there is some overlap between them. When selecting a paycheck template for your workers, keep this in mind. It saves time when documents have enough information to satisfy the needs of numerous agencies—for example, pay stubs that contain key hours, earnings, and tax data that satisfy both the Department of Labor and the Internal Revenue Service (IRS).
- New hire documentation, such as an offer letter, includes DOL-required information about the employee, such as their residence address, job title, and pay rate. You may also make an employee data sheet with needed information like the employee’s gender on it.
- I-9 documents: On the I-9, include information concerning the employee’s ability to work in the United States, as well as information needed by the Department of Labor, such as the employee’s complete name and Social Security number.
- Pay stubs: Typically represent hours worked each workweek, the basis for which wages are paid, as well as standard hourly or salary pay rates, overtime, and deductions, and provide information such as pay period, pay rate, and deductions. If you need a pay stub, use our free pay stub template as a starting point.
- Timecards show how many hours were worked, including unpaid lunch breaks and overtime. They may be paper or electronic, as long as the necessary information is kept for three years. If you still need a timesheet, start by downloading one of our free timesheet layouts and calculating total work hours using our free time card calculator.
- Documents pertaining to the termination: Show any final payments, such as unused paid time off or severance, as well as the last day worked.
- Include reasons for pay increases and merit raises, as mandated by the Equal Employment Opportunity Commission, in job assessments and salary reviews (EEOC).
- Show leave dates and any amounts paid as an FMLA requirement in your leave paperwork.
- ERISA-mandated payment amounts and plan papers are included in retirement income statements, along with 401(k) savings plan enrollment and records that reflect employee contributions.
- Everything from pay dates and holidays to termination and severance compensation is included in employee handbooks. It is recommended that you keep your employee handbook for at least three years.
Much of the evidence provided above is often found in personnel files. As a result, boxing personnel data once an employee departs the organization and saving such papers for three years is a simple approach to stay compliant. If you keep employee tax paperwork in the employee personnel file rather than separate payroll and tax files, you should keep it for four years.
What is the Best Way to Keep Payroll Records?
In most circumstances, you have three alternatives for storing payroll data that must be kept. You have the option of keeping the files on-site, boxing and storing the paper files off-site, or keeping the papers and data electronically. Here are some things to think about while storing payroll files on paper vs. electronically.
Off-site storage
If you don’t have enough space on your premises to store your paper records, there are storage businesses that can help. The advantage of using a secure off-site storage facility is that you don’t have to worry about running out of storage space or having personal health information, such as leave request forms, available to employees in violation of HIPAA regulations.
Electronically
DocuSign, for example, is a company that stores electronic data for you. Payroll data includes sensitive information such as birth dates, bank accounts, and Social Security numbers, so you’ll want to be sure the online data storage account is safe.
Document storage options are available in most HR and payroll software, enabling you to upload scanned copies of employee documentation such as the W-4 and I-9 forms. You may usually enter personnel information straight into the system.
Who makes the decision on what payroll data to keep?
The Department of Labor (DOL) and the Internal Revenue Service (IRS) decide what payroll data to maintain and for how long. Other organizations, such as the Equal Employment Opportunity Commission, are more detailed in their record-keeping policies for records used only to carry out their mandate.
The Fair Labor Standards Act of the Department of Labor requires you to preserve payroll records for three years. It doesn’t say which documents you must maintain, but it does ask for specific information like the employee’s name, address, Social Security number, and pay rate. The majority of this data may be found on hiring documents, pay stubs, and timecards, and includes:
- Name, gender, and Social Security number of the employee
- The full address of your home, including the ZIP code
- The function of the Job (job title or function)
- Types of compensation (hourly, salaried, commission)
- Working hours and salary rate
- Types of earnings (regular, overtime, additional)
- Total net income
- Date of payment and duration of job (pay period)
Furthermore, the ERISA mandates that you save all retirement plan documentation for six years, including premium payments and 401(k) plans. However, it also specifies that payment records should be kept for as long as the retirement plan can be audited. Enrollment documentation, payment documents, and paycheck deductions are among the records kept.
Employee/employer tax documentation, such as W-4s, payroll tax payments, and any W-2s that were returned undelivered, must be kept for four years, according to the IRS.
Unless you have the data saved electronically, you may wish to maintain paper pay stubs for four years (rather than three) since you must record payroll tax deductions for four years.
To avoid discrimination, the EEOC requires businesses to preserve payroll information for one to three years, which includes information such as pay scales, merit raises, and the justification for pay rate adjustments.
For example, according to the Fair Pay Act, you must maintain work evaluations for two years, which is the amount of time a current or former employee has to examine their personnel file and protest a wage rise.
Payroll Documents: How to Get Rid of Them
Some company owners ask whether retaining records longer than necessary poses a danger. Yes, it is correct. To prevent private data from being abused, financial or personal information associated with payrolls, such as bank account information, credit reports, or photocopies of a Social Security card, should be destroyed after the retention duration.
When removing data after their retention period has expired, the most essential thing to remember is to remove all files safely. You can shred data in your workplace, or if the volume is big, a firm that picks up and destroys business documents at your location or off-site may be a better option.
Keep a record of everything you’ve destroyed.
You should also keep track of which papers were destroyed when. It may be as basic as a spreadsheet that specifies the types of papers destroyed, the method of destruction (shredding, incineration), and the date of destruction. It’s also a good idea to include a signature or initial, as well as a date, so that you may contact the person who destroyed the papers if you have any issues.
Conclusion
When it comes to document retention, you’ll need to follow the DOL’s guidelines as well as state and federal government obligations. Keep payroll paperwork for as long as necessary, but no longer than is appropriate, to avoid the leaking of sensitive information. To prevent unauthorized access to private information after the “delete after” date has passed, shred or incinerate all papers.
If you don’t want to bother about keeping track of your payroll records, all-in-one HR software like Bambee can help. For only $99 per month, Bambee provides you with a professional HR manager who assists you in developing compliance HR policies and enables you to ask your workers to e-sign all of their critical employee papers using secure technology.
Frequently Asked Questions
What records should be kept for payroll?
The best records to keep for payroll are your last two months of bank statements, which should cover the previous 90 days. It is also a good idea to make copies of any other important documents as well in case they get lost or destroyed over time.
How long should you keep payroll files?
The short answer is you should keep them as long as they are relevant. Payroll files can be used to help with your taxes and expenses, so it is always a good idea to have these on hand for the future.
