Payroll records are a combination of the documents businesses must keep for each individual they employ. These documents are kept for legal and compliance purposes. They include employees’ personal details, new hire paperwork, timesheets, and tax documents.
Maintaining accurate and relevant payroll records is an integral part of workplace compliance. Payroll and labor laws dictate how and when employees should be paid as well as which documents you should retain. You must keep accurate payroll records in case your business is audited.
Payroll records may have some overlap with employee records. However, officially they have separate requirements.
Employee records vs. tax records
As stated above, payroll records are the combined documents a business must keep to ensure legal compliance. These records will include any information that affects employee pay. For example, employment eligibility, tax forms, paid time off (PTO) and leave records, and salary information.
Employee records are the combination of all information about an employee. These records include employee names, Social Security numbers (SSN), employment eligibility, and benefit enrollment plans.
All payroll records will be employee records. However, not all employee records are payroll records. For example, an employee’s SSN should be stored as both an employee record and a payroll record. An employee’s disciplinary record should be filed as an employee record and is not required for payroll records.
Employee records must be kept in a secure location, such as an employee database. This ensures that your business complies with data protection laws.
Why Are Payroll Records Important?
Keeping accurate payroll records is crucial to running a legally compliant business. Here are some of the most important reasons why.
To ensure equality
Your payroll records should contain your employee’s gender, age, ethnicity, or information related to any other protected characteristic. Comparing the data you have to pay scales can help ensure your employees are paid equally, regardless of protected status.
For easier reporting
Workplace compliance is essential for running a business legally. Your business is governed by state and federal tax and employment laws in the US. Keeping accurate payroll records proves that you are compliant with these laws.
There are also official governing bodies surrounding payroll processes. These include the Department Of Labour (DOL), Internal Revenue Service (IRS), Fair Labor Standards Act (FLSA), and Equal Employment Opportunity Commission (EEOC). These bodies dictate that certain payroll documents must be retained for specific periods. This will help with oversight and if your business is audited.
What Documents Should I Keep for Payroll Records?
Several documents need to be collected and stored to ensure accurate and compliant payroll records. Read on to understand what documents you need to keep.
Employee information and documentation
The Department Of Labour (DOL) dictates what payroll information you must keep. The DOL does not specify which documents you need to keep but instead specifies what information you need to keep.
For example, the DOL stipulates that you must keep a record of your employee’s full name but does not specify which document you should keep. A record of your employee’s passport, driver’s license, or any other government document showing their full name is acceptable.
Additional required payroll information.
- Date of Birth (DOB).
- Social Security number (SSN).
- Full resident address—including zip code.
- Sex and gender.
- Occupation—including your employee’s job role and function.
- Payment agreement—including whether an employee is paid hourly or salaried.
- Working hours—including whether an employee is considered part-time or full-time.
- PTO and leave records.
- Rate of pay or salary.
- Details surrounding pay increases.
- FLSA exemption v. non-exemption status.
- Employee payslips. An employee’s payslip will contain information such as overtime earnings, payroll deductions, pay dates, and pay periods.
Keeping tax documents such as W-4s and W-2s on file is key to maintaining accurate payroll records. All new employees need to complete a W-4. It should contain their full name, SSN, address, and tax allowances.
A W-2 is an important tax document that reports earnings to the IRS so employees can complete their annual tax returns. You must complete a W-2 for each employee so that they can report their earnings and withholdings.
It’s also important to keep hold of any unemployment forms you issue during the tax year. This might include Form 941, which is a form that employers fill in to show how much federal unemployment tax their business paid.
You will also need to keep any wage detail reports your business sends to unemployment and tax authorities. These reports are usually sent quarterly.
Under the United States Citizenship and Immigration Services (USCIS), you must ensure that your employees have the right to work in the United States. Filling in Form I-9 evidences that you have verified that your new hire is authorized to work in the United States.
Form I-9 also shows that you have completed your due diligence and contains all necessary information for the Department of Labor. This form must be stored for 3 years and kept separately from employment records.
New hire reports
New hire reports need to go to your local state authority within a few days of hiring an employee. You should also retain a copy of your new hire reports in case you need to refer to them at a later date.
How Long Are You Required to Keep Payroll Records?
The different local and federal bodies determine how long you should keep various payroll records. Below we have included an easy-to-use table to help determine how long you should keep a document.
|1 Year||2 Years||3 Years||4 Years||5+ Years|
|Job application and interview documents||Pay increases or change to pay grade||Hiring documents||Employee payslips||Retirement documents|
|Americans with Disabilities Act (ADA) records—for businesses with more than 15 employees||Form I-9||Tax documentation such as W-4’s and W-2’s||401(K) plans|
|Employee time cards||Payment or employment dispute documents|
|FMLA leave details|
State-specific laws about payroll records
Most states follow the same federal guidelines for payroll record retention. However, 4 states have slightly different laws.
- New York has enacted the Wage Theft Prevention Act, which increases the retention period for payroll records. If your business is based in New York, you must keep all records related to pay for 6 years—not the standard 3.
- In California, payroll records for non-exempt employees must be retained for 4 years. For exempt employees, you must retain their payroll records for 8 years.
- In Illinois, payroll records must be retained for 5 years.
- In Washington, payroll records must be kept for 3 years. If you are audited and cannot produce the correct documentation, the Department of Labor and Industries in Washington will charge you $250 for each non-compliance.
How to Store Payroll Records
There are 3 different options for how you can store payroll records. You can keep paper-based payroll records on-site, store your paper-based records off-site, or use a digital organization system.
How you store payroll records will depend largely on the size of your business. For example, it may not be viable for a Multinational Enterprise (MNE) to keep all its payroll documentation at its office. Likewise, a small business may not be financially able to rent an off-site storage unit for payroll retention. It’s about finding what works for your business.
Should you decide to use a digital organization system, you must ensure that documents are backed up effectively. Software like Connecteam will back up any HR and payroll documents to their cloud-based system. All your documents will be backed up in case of a tech emergency. You can also decide who can access your employee’s confidential documentation and easily view each digital document.
However you choose to store your payroll records, the documents must be stored safely and securely. Records may need to be accessed at short notice, so the documents must be well-organized and easy to access.
Once a document has exceeded its retention period, it’s good practice to destroy it securely. Destroying unnecessary documentation prevents your employee’s confidential data from being misused.
You can shred physical documentation and dispose of the paper chips. For digitally stored records, you can simply delete the file. If you delete the document from your computer, be sure it has been completely deleted from your hard drive. This will help to prevent any data loss in the case of a cyber-attack.
Payroll records are the combined documents you must keep to comply with the DOL’s laws and regulations. While the DOL does not specify what documents you need to keep, they are specific about what information you need to retain.
You must be legally compliant with all requested information to ensure you have good oversight of your business in case you are audited.
You need to keep different documents under the DOL’s guidelines for different periods. You should familiarize yourself with the different retention periods and destroy any documentation you no longer need.