How Long Does a Business Need to Keep Payroll Records

How Long Does a Business Need to Keep Payroll Records

Keeping or retention of employee information is an essential function of any business entrepreneur. Payroll is one of the records that should always be kept while maintaining confidentiality. 

The main question one may ask is for how long as an employer, you should retain personnel or employment records. Well, the Internal Revenue Service has clear guidelines on this, especially on the payroll, but for other records, it mainly depends on the type of details that an employer may have.

Payroll Records

These are documents that relate to an employee’s payment.  The following are information that an employer must have in their payroll files:

Payroll Records - How Long Does a Business Need to Keep Payroll Records
  • Contact information of an employee, i.e., full name, address, and Social Security number.
  • Job title
  • Start date and duration of the contract
  • Working hours
  • Remuneration details, i.e., salary and other benefits
  • Payment mode; salary or hourly pay and overtime earning if any
  • All additions and deductions from the employee’s wages
  • Total wages paid each pay period
  • Payment date and the pay period covered by the payment
  • W-2, W-3, W-4, W-5; 941 & 944 forms

Other payroll records that you require to store are any reimbursements done to an employee.

To avoid penalties, the above records should be kept for a specified period.

Agencies that Govern Payroll Records

1. Internal Revenue Service (IRS)

Internal Revenue Service’s (IRS) requires that employee tax records ought to be retained for a minimum of four (4) years.

Internal revenue service - How Long Does a Business Need to Keep Payroll Records

Below are the records that should be kept:

  • Employer identification number (EIN)
  • Commencement of employment
  • Contact information of an employee; full name, address, and Social Security number.
  • Report on payments for all salaries, annuity, and pension payments
  • Amounts of tips reported.
  • Employee copies of W-2 forms returned as undelivered.
  • Employee details on payment done while they were absent as a result of sickness or injury; that is the amount and weekly rate of payments made to them by the employer.
  • Employee details on income-tax and withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V)
  • Report on tax deposits and copies of returns filed.
  • Records of allocated tips; and fringe benefits provided, as well as proof.

2. Fair Labor Standards Act

An employer is required to maintain or keep payroll records. Mainly an employer keeps information of each employee, hours they work, job evaluations, collective bargaining agreements, as well as their pay.

Fair labor standards act - How Long Does a Business Need to Keep Payroll Records

3. Equal Employment Opportunity Commission

For discrimination prevention in the workplace, the Equal Employment Opportunity Commission (EEOC) requires you to keep all personnel records.  This is because; the records can prove if there was any discrimination involved with an individual’s termination.

Equal employment opportunity commission - How Long Does a Business Need to Keep Payroll Records

Duration of Retaining Pay Stubs

The Internal Revenue Service and the Family Medical Leave Act mandates business owners that pay stubs are retained for up to a minimum of three (3) years. Staff members taking unpaid leave for medical or family reasons are protected by the Family Medical Leave Act.

Duration of retaining pay stubs - How Long Does a Business Need to Keep Payroll Records

The business employee handbook should detail the Family Medical Leave Act policy and guidelines to ascertain if pay stubs reflect whether an employee took unpaid leave or if they used paid time off.

According to the Fair Labor Standards Act, employers are required to keep records providing details on the employees including their names, Social Security number, address, and wage rate. These can be found in on-boarding documents, and payment details.

These documents also contain other details like payment type, types of earnings, working hours, work period, and payment date among others.

Duration of Keeping I-9 Forms

This is a form used to verify the identity of a given employee. It also acknowledges that one is legally allowed to work in the United States. It contains confidential information like the employee’s Social Security number, among others.  Employers shouldn’t keep these documents longer than three years.

Duuration of keeping I-9 forms - How Long Does a Business Need to Keep Payroll Records

If an employer keeps this document for more than three years, then it may expose the employee to a security risk. 

Misuse of employee information and identity theft risk will be minimized by disposing of these forms as well as personal payroll records such as bank account information, credit reports, or copies of Social Security cards.

Duration of Keeping 401(k) Records

The Employee Retirement Income Security Act requires business owners to have retirement plan records, for a minimum of 6 years. Compliance and agreements are some of the other documents that should be kept for the same period.

Duration of keeping 401k records - How Long Does a Business Need to Keep Payroll Records

Duration for Storing Other Payroll Records

Payroll records differ, and each record has its time limit that a business owner can hold on to. Below find retention requirement for each payroll document:

YearsPayroll Document
Seven YearsTermination records
Six YearsRecords related to medical benefits, plans or deductions
Four YearsForm W-4
Form W-2
Payroll tax payment and deductions documents
Any employee or employer tax documents
Three yearsHiring forms
Form I-9
Employee handbooks
FLMA leave details
Two yearsPay grade information
Merit increases
Hiring records (post-hiring-date documents like job evaluations)

Does every state have the same rules?

These guidelines by the department of labor are followed by all states apart from a few namely: California, New York, Illinois, and Washington,

Does every state have the same rules - How Long Does a Business Need to Keep Payroll Records

Theft and prevention Act in New York requires that business owners keep payroll records for a minimum of six years as opposed to three years. 

It also requires all employers to provide written notice of pay rate to their recruits. The notice should include details of the employer and the wage rate info, office number, and allowance paid.

California State requires employers to hold on payroll records for six years as well. On the other hand, Illinois requires businesses to retain payroll records for five (5) years.

Washington follows the department of labor guidelines, but it provides more specification of information it desires for business to keep.

It is recommended that as an employer, you take a step to understand the specific requirements within your state to avoid involuntarily disposing of records that you may be required to hold onto.  

Storing Payroll Records

With the advancement in technology, many employers or business have transformed their operations electronically. This has made employers invest in payroll systems

Storing Payroll records - How Long Does a Business Need to Keep Payroll Records

However, for small or start-up businesses that have paper payroll records, we recommend that they keep their employee records in a locked filing cabinet or registry. 

It is also essential to ensure that personnel records are scanned and saved in documents on a digital cloud for purposes of safety and unexpected calamities like fire, flood, etc.

However, it is advisable to store payroll records in an online system or software management solution, which is clear to your business and meets the agency’s payroll requirements. For documents that have reached their expiry period of holding, they should be shredded.

As an employer, it is vital to retain personnel and payroll records since they can be beneficial to the business in a situation where an employee takes legal action against the company. Without these documents, you may end up spending a lot of money in legal battles.

Do's and Don'ts of Employee Recordkeeping