Your business needs to keep payroll records but for how long? Here's what you need to know about storing payroll records.
- Organizing your payroll records by year and file type is a good way to store them. The best way to securely dispose of payroll documents once they've reached their throw-out date is to shred them.
- Knowing which documents the IRS and U.S. Department of Labor require you to keep, and how long they require you to keep them, is key to properly managing your payroll documents.
- Preserving payroll records is a good way to ensure you have internal control of your company.
Whether you work in construction or software development, managing your employee payroll records is a task no company is exempt from. Keeping payroll records is a legal obligation and how long you must keep these documents is determined by the law. Storing these sensitive documents can be unwieldy, which is why business owners need to know when it's OK to dispose of old records. Also, storing all of your old records isn't recommended either, as it can lead to security issues.
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What are payroll records?
Payroll records are the documents you keep to track and inform everything regarding an employee's paycheck. They cover hours worked, wages, taxes, benefits and any other financial or important information related to paying an employee. Payroll records can be physical, digital or a combination of the two.
What are the payroll record policies?
The Fair Labor Standards Act, or FLSA, establishes employment provisions like the minimum wage and overtime pay. The FLSA has also established requirements about how long employers must store certain payroll records.
Payroll records typically contain the following information:
- The employee's full name and Social Security number
- Address, including ZIP code
- Birthdate, if younger than 19, and sex
- Time and day when employee's workweek begins
- Hours worked each day
- Total hours worked each week
- Whether the employee is salaried or paid hourly
- 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
- Forms W-2, W-3, W-4, W-5
- Forms 941 and 944
- Records of benefits
Why should I keep payroll records?
Payroll records, like any paperwork, serve to document decisions made and actions taken by a business. They are the living proof of what you have and have not done. These records are important for complying with federal and state regulations, but they do more than keep you out of trouble. They help with business management and administration.
Keeping payroll records for the appropriate amount of time is in your best interest, because failure to do so can lead to expensive fines and penalties if the IRS ever audits your company.
But the IRS isn't the only agency that monitors payroll documents. The Wage and Hour Division of the U.S. Department of Labor and the Equal Employment Opportunity Commission (EEOC) mandates that you save certain employee payroll information to comply with the FLSA, the Family Medical Leave Act (FMLA) and the Employee Retirement Income Security Act (ERISA).
Following payroll document retention protocol is important because it protects you and your business from legal and monetary penalties.
"After a few years, someone can go to the labor department and say they didn't get paid," said Charles Read, CPA, USTCP, and president and CEO of GetPayroll.com. "If you can't prove those hours [were paid], and they have a little hand notebook as evidence, then (the judge) may take their word and make you pay it."
Without the right documents on file, a disgruntled employee who sues your company can cost you a ton of money and, depending on the outcome, possibly your company.
Preserving financial statements also ensures you have internal control of your company. Keeping tabs on your payroll documents prevents you from being ignorant of your company's financial state. When you aren't tracking your financial affairs, especially payroll, you leave the proverbial door wide open for dishonest employees, bookkeepers or payroll processors to steal from you.
There's another important reason why your payroll and personal records should always be up to date. Companies change all the time, said Jason Averbook, co-founder and CEO of Leapgen. Employees join and leave businesses, and having an accurate record is helpful for those in charge of managing staff.
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How long should you keep pay stubs?
The IRS and FMLA mandate that pay stubs be kept three years. The FMLA protects employees who take unpaid leave for family or medical reasons. While your employee handbook should detail the FMLA policy and guidelines, pay stubs reflect whether an employee used paid time off or if they took unpaid leave.
The FLSA requires businesses to keep specific documents that list information like employee name, address, Social Security number and pay rate – all of which can be found on hiring documents, paychecks and pay stubs. Other information, such as pay type, hours worked, earnings by type, total net earnings, date of payment and work period, can be pulled from those documents.
How long should you store I-9 forms?
An I-9 form, which verifies the identity of an employee and that they are legally allowed to work in the U.S., contains sensitive information, such as a person's Social Security number; as such, you shouldn't keep these documents longer than three years.
You run a security risk if you keep I-9s longer than three years. By disposing of these forms, as well as personal payroll-related data – bank account information, credit reports or copies of Social Security cards – it lowers the risk of identity theft and your employee's information being misused.
How long should you keep 401(k) records?
You need to keep retirement plan records, including plan operating documents, agreements, compliance documents and participating notices for at least six years, according to the Employee Retirement Income Security Act.
How long should you store all other payroll records?
Each payroll record is different and has a different life span in your filing cabinet. Here are the retention requirements for payroll documents.
- Termination records
- Records related to medical benefits, plans or deductions
- Form W-4
- Form W-2
- Payroll tax payment and deductions documents
- Any employee or employer tax documents
- Hiring forms
- Form I-9
- Employee handbooks
- FLMA leave details
- Merit increases
- Paygrade information
- Hiring records (post-hiring-date documents like job evaluations)
The EEOC enforces civil rights laws to combat workplace discrimination and requires job evaluations to be kept for two years.
"This is so you have a company basis to defend yourself if a disgruntled employee comes back with a lawsuit of discriminatory practice," Wagner said.
As an employer, you want a paper trail of the terminated employee's behavior and how they were assessed over time so you can defend why they were let go.
Are the rules the same in every state?
Except for California, New York, Illinois and Washington, all states follow the same guidelines as the Department of Labor.
New York's Wage Theft and Prevention Act requires that employers keep payroll records for six years, not three years. This law also requires New York employers to provide a written notice of wage rate to their new hires that includes pay rate information, the official name of the employer, address and phone number of the employer's office and allowances taken.
California requires businesses to keep payroll records for six years, and Illinois requires you to keep them for five years. Although Washington follows the Department of Labor's guidelines, it's more specific as to the information it wants employers to keep. For example, Washington's legislation on payroll and personnel records states that they require, "the number of units earned or produced for each worker paid on a piecework basis" and "the risk classification applicable to each worker whenever the worker hours of any one employee are being divided between two or more classifications."
Make sure you understand the requirements for your state so you don't inadvertently dispose of records that you may, in fact, still need to hold onto.
How do you store payroll records?
Although many business operations, including payroll, are done electronically, paper, in some respects, is still king. If you store paper payroll records, keep that information in a locked filing cabinet. If you're looking for a greener method, you can scan a copy of your paper records, said Wagner. However, keep both paper and digital copies of important documents, because paper files could get damaged by a flood or fire, and digital copies could be permanently lost if your network has a meltdown.
You can store personnel documents in an online system using payroll software or a document management solution. Whatever system you use, use a system of organization that is clear to you. Organizing records by year and file type is a good way to start, and each year when payroll records reach their throw-out date, shred them.
Who is permitted to see employee records?
Payroll records are considered protected information. While each state sets its own rules, every state has limitations on who is permitted to view the files.
Payroll records are typically included in employee personnel files. They can be stored and classified alongside personal information, employee identification information, and similar details and files.
In most states, direct supervisors, HR personnel and the specific employee named in the file are permitted to view the records as needed. One type of file should not be included in the standard personnel records: medical records. They are governed by different regulations, and there are federal rules concerning how they can be stored and viewed.
How to properly get rid of payroll records.
Payroll records can be shredded when they are no longer needed, and there are certain recommendations about the best way employers can dispose of this sensitive information.
Shredding payroll records
Before destroying documentation, always double-check that the records are no longer necessary or required to be stored. Assuming that it's OK to dispose of the information, the most reliable means is to enlist a shredding service. They will ensure the documentation is destroyed beyond recovery. This notice recommends that shredded data be reduced to particles no larger than 2.4 millimeters by 15 millimeters.
Permanently deleting electronic records
To properly delete electronic records, it is not enough to simply hit a delete keystroke on data-management software. Deleted data can be reconstructed. Secure deletion is possible on any device, but it will typically require third-party software. Many viable options exist. As long as the information undergoes a secure delete, it should prove sufficient.