What records should you keep? How long do you need to keep the records? Can you keep digital records, or do you have to keep paper records?
These are questions that I am often asked regarding payroll recordkeeping, and the short answer is that it depends. Each agency has its own requirements, and it is important to know the differences. At any time, you may be required to produce payroll records to demonstrate compliance (such as if an employee makes a complaint), and as it is the government typically tends to side with the employees. If you don’t have the proper records, this will occur.
What records should you keep?
In general, you should keep all employee and payroll data. This is also referred to as a master data file. The master data file should include the employee’s name, address, gender, date of birth, social security number, W4 information (filing status, dependents and other deductions claimed, additional withholding, exempt status, and if they are a non-resident alien), work state, work location, employee ID number, occupation/job title, wage and hour data (hire date, shift differential rate, termination date, bonuses paid, pay dates, pay frequency), exempt/non-exempt status, hours worked (per day/week, work week, regular rate of pay by workweek, any additional pay or deductions, OT hours and premium pay) and direct deposit forms.
While that sounds like a lot of information, it is information that you can (and should) be able to access very easily.
How long do you need to keep the records?
The Internal Revenue Service (IRS) requires you to retain the master data file information for four years after the due date or the date the tax was actually paid. This includes records for Federal Unemployment Tax.
The Immigration Reform and Control Act (IRCA) requires that employers have their employees complete an i9 if the employee was hired after November 6, 1986. The employer must retain the i9 for three years after the date of hire or one year after termination, which date is later.
The National Automated Clearing House Association (NACHA) requires that you keep written direct deposit information on file for two years after termination, or two years after the last time a direct deposit was made to that account. NACHA does not require that direct deposit information be submitted in writing, it can be submitted orally but then you need to keep a recording of that information for the same time period as the written records.
The Fair Labor Standards Act (FLSA) requires that you keep the master data file information for three years after the last date of entry. The records need to be accurate, complete, and understandable, be safe and accessible and available for inspection at any time. There are special recordkeeping requirements for white collar employees, hospital employees, tipped employees, industrial homeworkers (not remote workers) and for remedial education.
The Family and Medical Leave Act (FMLA) has the same requirements as FLSA, requires that medical records be kept confidential, and that you must have copies of all notices, benefits/policies, premiums paid and any disputes.
The Affordable Care Act (ACA) requires that you keep all records for 3 years, even if the act is later repealed.
State Retention Policies. Each state has their own retention policies. If you have employees in multiple states, and each state has different retention policies, it is a good idea to make a blanket retention policy that will allow you to retain ALL documents for whichever state has the longest policy. If a state has a retention policy that is shorter than federal guidelines, you must follow federal guidelines as your minimum, not the state guidelines.
Can you keep digital records?
Yes. No agency specifies if the records need to be paper or digital. However, if you are in a situation where you need to go to court, you will need to be able to convert the digital records to paper. It is as simple as printing the documents from the digital file onto paper.
The law lists the minimum requirements. You can always keep the records for longer. It is also important to note that every agency considers recordkeeping an employer responsibility. Payroll service providers are only required to keep documents on file for 2 years, so it is important that you maintain your own personnel files.
I hope that you found this information useful.
This information is accurate as of February 17, 2022.