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Everything You Need to Know About Keeping Payroll Records

Payroll-Records

Payroll record keeping is a necessary part of the larger payroll process. Just as completing payroll correctly is important, proper payroll record-keeping helps your company stay compliant with the law and avoid penalties.

What are Payroll Records?

Payroll records are the documentation that employers must keep for each individual. These records are a set of information that companies keep for a certain extent of time in accordance with the Fair Labor Standard Act and the IRS. The basic specific information that employers must keep outlined by the US Department of Labor is:

  • Employee's full name and social security number.
  • Address, including zip code.
  • Birthdate, if younger than 19.
  • Sex and occupation.
  • Time and day of the week when an employee's workweek begins. Hours worked each day and total hours worked each workweek.
  • The basis on which employee's wages are paid.
  • Regular hourly pay rate.
  • Total daily or weekly straight-time earnings.
  • Total overtime earnings for the workweek.
  • All additions to or deductions from the employee's wages.
  • Total wages paid each pay period.
  • Date of payment and the pay period covered by the payment


How to Store Payroll Records

Every payroll record must be kept for a certain amount of time in accordance with the law. Figuring out a method of storage that will keep records safe, and accessible so you’ll have to decide the best way to store them. The IRS explains that you can choose any type of record-keeping system whether that’s electronic or paper, as long as it contains necessary information.


Payroll Record Regulations

Knowing what records are necessary to keep is a best practice for any business. Check both your federal and state record regulations for compliance.

Federal Records

Before you dig into the specifics of federal record-keeping, it can be helpful to understand why you have to keep federal records in the first place. The IRS explains that federal record-keeping is not only beneficial for monitoring business and keeping track of income, expenses, and property. But it is also necessary to prepare a financial statement and tax return and ultimately support items on your tax return.

The specific records the IRS says you need to keep include:

Gross receipts

Gross receipts are any income you receive from your business. The IRS recommends you have supporting documents to show your sources of gross receipts. Examples could be:

  • Cash register tapes
  • Deposit information (cash and credit sales)
  • Receipt books
  • Invoices
  • Forms 1099-MISC


Purchases

Purchases include any items you buy and resell. Supporting documents should identify the payee, the amount paid, proof of payment, the date incurred, and include a description of the item to show that the amount was for purchases. Examples could be:

  • Canceled checks or other documents reflecting proof of payment/electronic funds transferred
  • Cash register tape receipts
  • Credit card


Expenses

Expenses are any costs you have as a business (other than purchases). Supporting documents should identify the payee, the amount paid, proof of payment, the date incurred, and include a description of the item purchased or service received that shows the amount was for a business expense. Examples of this could be:

  • Canceled checks or other documents reflecting proof of payment/electronic funds transferred
  • Cash register tape receipts
  • Account statements
  • Credit card receipts and statements
  • Invoices


Travel, Transportation, Entertainment, and Gift Expenses

If you plan to deduct any of the above, you’ll need records to prove the expense. You can find more information here.

Assets

Assets are any property, machinery, or furniture that you own and use in business. Record keeping for the annual depreciation and your gains and losses must be shown. Supporting documents could include:

  • When and how you acquired the assets
  • Purchase price
  • Cost of any improvements
  • Section 179 deduction taken
  • Deductions are taken for depreciation
  • Deductions are taken for casualty losses, such as losses resulting from fires or storms
  • How you used the asset
  • When and how you disposed of the asset
  • Selling price
  • Expenses of sale

Documents may show this information.

  • Purchase and sales invoices
  • Real estate closing statements
  • Canceled checks or other documents that identify payee, amount, and proof of payment/electronic funds transfer


Employment taxes

These specific tax records must be kept in accordance with tax law.

State records

In addition to federal records, every state has specific payroll record-keeping requirements. Although most states are similar, some states' scope and time required to keep each record vary. States like NY, CA, IL, and WA have specific rules. NY’s wage theft prevention act requires records to be kept for six years. While in CA, payroll records must be kept for 4 years and 8 years if employees are exempt. Illinois requires 5-year records. WA has the same requirement of time as the government (3 years) however, penalties are higher if you are not compliant. Regardless of the state, it’s recommended to check your state’s department of labor every year to ensure you are up to date on record-keeping practices.

How Long to Keep Your Payroll Records

After you’ve determined which payroll records you have to keep, you simply have to file them away for a certain amount of time. The amount of time you keep payroll records is a large part of payroll record-keeping compliance. As we mentioned above, check with your state around state guidelines. For federal guidelines, payroll records must be kept for 4 years.

Federal record-keeping

  • 2-year record keeping: For any wage computation- i.e time cards, wage/rate tables, work, and time schedules, etc.
  • 4-year record keeping: For all payroll records, collective bargaining agreements, sales, and purchase records.