What Are Payroll Records & How Long Should You Keep Them?
Running your own payroll as a small business owner is challenging when you’re also focusing on expanding your operations. Payroll is a vital but time-consuming process with countless requirements to consider. It’s no wonder that so many small businesses don’t know how to organize their payroll records or remember to submit them on-time.
The trouble with keeping track of payroll records on your own is knowing which ones actually apply to your business. Learn about what payroll records you need to keep, what they’re used for, when to submit them, and how to build a process that will manage record-keeping as you grow your business.
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What Are Payroll Records?
There are lots of ways you can approach payroll records to understand what they are and the info they can include. Start by defining your records as the wages that you pay your employees. They also function as statements of income that you share with the government. That’s because when you run payroll – or pay your employees their wages – you withhold different amounts for taxes, insurance, and retirement opt-ins that the federal government can appropriate.
Why Do You Need Payroll Records?
Small business owners who are setting up shop need to keep payroll records, legally speaking, just as much as CEOs of nationwide enterprises. Your payroll records help you prove to the government that your employees are collecting the money you owe them, on-time, every pay cycle. They also let the IRS know that you’re withholding the right types and amounts of taxes from your employee’s paychecks.
A complete collection of payroll records is also your business’s way of complying with the Fair Labor Standards Act (FLSA), which we’ll cover shortly. The FLSA enforces federal rules on your payroll records, so you need to maintain accurate payroll records to avoid trouble from the IRS. Without a system to manage your payroll records, you expose your employees’ sensitive information to unauthorized access.
The Fair Labor Standards Act (FLSA)
The FLSA, passed in 1938, applies to any business whose annual sales surpass $500,000. Small businesses need to be familiar with FLSA requirements, which operate at the federal level, before they start to look at any state-level requirements. This approach lets business owners build their record-keeping systems around FLSA requirements, and later tweak to state-specific requirements when they know what additional payroll information they need to keep.
The FLSA has different requirements for your non-exempt and salaried employees which you should become familiar with. Companies are federally required, for instance, to maintain basic payroll and wage base information for exempt employees. On the other hand, they only need to submit timecard information — like workweek timestamps and weekly hours worked — for non-exempt employees. These requirements will quickly become overwhelming if you don’t structure your record-keeping process around them.
States provide their own guidance regarding payroll record-keeping. There are certain parties, like insurance companies and state-level audit agencies, who have different record-keeping requirements from the IRS. You may be at risk of neglecting your workers’ comp coverage responsibilities if you don’t keep additional payroll records.
Contact a federal and state-level authority at an insurance or auditing agency who can help you figure out what additional payroll records you need to keep per FLSA requirements. The Department of Labor (DOL) also maintains useful state resources that can help your business submit all its payroll records on time.
What Information Needs To Be Included In Payroll Records?
There are payroll items that you’ll always need to keep handy, and each one has its own requirements for how long you need to keep them. It doesn’t make sense to try and memorize them all when you’re focusing on your clients.
Rather than gamble with your chances of being fined by the federal government, you can instead become familiar with their payroll requirements. A solid base of knowledge will also let you choose a record management system that suits your business’s size and scope of operations down the road.
It’s your responsibility as a business owner to keep accurate payroll records for each and every employee, even if it’s just you and a couple of others running company operations. You should include a checklist as part of your record-keeping process to make sure you hit all your federal and state-level requirements.
Your checklist of payroll records should include:
- Personal employee info including full names, SSNs, and offer letters.
- Your employer identification number, or EIN, to make it easy for the IRS to review your tax statements. (Learn how to find your EIN.)
- A complete collection of wage-related data such as total amounts as well as dates and times you paid your employees during a pay cycle.
- Time-related activities for non-exempt employees, including hours worked per week and times clocked in and out.
- Regular employee deposits to savings accounts, insurance, and pensions.
You’re also responsible for fulfilling other record-keeping requirements, which are usually defined at the state level. You’ll need to double-check with a state authority to be certain, but chances are high that you’ll have to furnish workers’ compensation insurance for your employees. Authorities who conduct labor department audits or work at insurance agencies will ask for additional requirements depending on which state you operate out of, too. Bear in mind that your record-keeping requirements will also change based on the ratio of exempt to non-exempt employees your business employs.
The Best Way To Store Payroll Records
The best storage solution for your business will depend on how many requirements you need to follow at the federal and state level. It becomes difficult to keep all required payroll records organized, even if you employ just a few personnel. The best solution, whether on paper or electronic, keeps your employees’ payroll records confidential and in one place.
Electronic solutions have the advantage of self-service and centralization. The biggest attraction of record management software is the ability to centralize a massive amount of information — and then protect it by controlling who has access to it, and when. Some of these electronic solutions also let employees submit tax information to the IRS themselves, which streamlines the record-keeping process even further and lets you focus on business operations.
It’s ultimately up to business owners to decide on a record management solution that works best for them. A good practice to follow is to keep your payroll records separate from your business’s financial, legal, tax, and insurance documents. This will make it much easier for you to furnish necessary records for FLSA authorities if they ever decide to inspect your payroll records.
How Long To Keep Payroll Records
The IRS is clear that businesses are required to hold on to most payroll records for three years, although more sensitive information like taxes and retirement statements need to be kept for even longer. For information that you use to calculate wages for your non-exempt employees, like timesheets and schedules, the FLSA only requires that you keep records for two years.
The Department of Labor also has several items they need you to keep for extended periods of time. These are sensitive documents, important to your employees, no matter how big or small your business is.
Mandatory payroll records you need to keep for longer than three years are:
Statements of your employees’ 401k or profit-sharing through a retirement plan are some of the most sensitive records you need to keep. The DOL requires that you hold on to your employees’ retirement income statements for six years, which includes enrollment, payment, and deduction forms.
Also crucial to hold onto are your employee wages. Paystubs are critical because they prove to the DOL that you’ve paid your employees on time every quarter. You’ll keep your wage records for four years, including adjustments you’ve made to wages within that time frame.
Forms for your employees’ taxes have longer than usual required holding times. The IRS is clear that you should keep info such as W2s and W4s for four years. On top of employment tax requirements at the federal level, you should check with your state’s requirements to see what additional tax information you need to keep.
The DOL is a bit more lenient with your other payroll records. Forms like your employee I-9s, timesheets, and offer letters need to be kept for only three years. If you still feel unsure, check with either a federal or state-level authority to confirm what the time frames are for your payroll record submissions.
Getting Your Business’s Payroll Records In Order
Digital platforms and third-party solutions give small businesses more options than ever to manage their employee payroll records. No matter what solution you go with, though, your main focus should be to streamline your management process, so that you’re not relying on any guesswork. You’ll also want to keep your payroll records organized in one place once you understand your federal and state requirements.
Most modern management platforms will help you organize all payroll information that the government requires in one place. This does two things: it automatically tailors payroll requirements to each of your employees and syncs government due dates to your platform. These systems also often give your employees a self-service method to submit tax info to the IRS themselves.
Once you have a firm grasp on federally and state-required payroll records, as well as a new record management system to boot, you can start thinking about scaling your company’s payroll operations. Maybe you’ll integrate your existing platform with a payroll department, or go completely virtual with a cloud-based payroll solution. Either way, you’ll now be ready to make informed payroll record management decisions that are right for your company.
Ready to learn more? Read our comprehensive payroll software and services reviews. Then, head over to the payroll section of the Merchant Maverick blog for information about everything from creating paystubs to buying liability insurance.