Storing Payroll Records: Record-Keeping Best Practices You Need to Know

Keeping payroll records is an important step for any employer. But it doesn’t take long for your financial files to become borderline unmanageable. As small businesses get off the ground, it often becomes clear that having an individual file for every employee’s paperwork just isn’t feasible.

Knowing when to tidy up the physical and virtual filing cabinets can be challenging, so the question remains: how long do you have to keep payroll records and which ones should you keep?

You can’t just throw files away—especially when employers make an average of 15 mistakes per pay period (resulting in $78,700 per 1,000 employees per year). Without access to these records, you can’t resolve issues, nor can you use the data they contain to make educated budgeting decisions.

BambooHR® Payroll makes it easy for organizations to create, store, and maintain key personnel files. Read on to learn about different types of payroll records, their retention requirements, and what you can do to stay organized.

Why Do You Need to Keep Payroll Records?

When it comes to financial transactions and record keeping, your organization needs to be accountable for its past. It doesn’t matter whether laws change or employees leave. If you’re audited, you’ll need to show that you were compliant with the requirements at the time to avoid fraud charges and increased scrutiny.

It’s not just the government that may request payroll records. Current and former employees may need to access these records in case of a dispute or civil lawsuit over compensation. Having correct records helps shield your organization and your managers from false accusations.

Ultimately, staying compliant with payroll best practices ensures your organization continues to grow and mitigates risk. If an error or lawsuit occurs, good payroll record-keeping practices might be the difference between your business thriving and going under.

How Long Does the IRS Require You to Keep Payroll Records?

Keep employment tax information for at least four years. Generally, the IRS upholds a three-year statute of limitations for audits, but the limitation is waived if an employment tax return isn’t filed, and there’s no expiration date for uncovered fraud. Having properly stored and accessible tax records helps keep an audit from snowballing into more stringent requirements and lasting suspicion.

Tax records typically include the following documents:

Tax Forms

Employees who pay taxes are required to fill out official tax forms provided by the government. These forms help ensure the amount earned by the employee and the taxes paid are accurate. Employers should save these documents to forecast future tax needs and ensure accuracy.

Examples of tax forms include:

• Form W-2, Wage and Tax Statement
• Form W-3, Transmittal of Wage and Tax Statements
• Form W-4, Employee’s Withholding Certificate
• Form 941, Employer’s Quarterly Federal Tax Return
• Form 944, Employer’s Annual Federal Tax Return

In addition to these general tax forms, you should also keep the financial records for your benefits.

Retirement Documents

As employees prepare to retire, they’ll need to gather certain documents to create a retirement account for themselves or their dependents. For instance, these may include forms for a Simplified Employee Pension Plan (SEP), an IRA that only allows employer contributions, or a Savings Incentive Match Plan for Employees (SIMPLE), a plan that allows employee and employer contributions.

Among others, the retirement plan documents you need to keep for SEP and SIMPLE IRAs include:

• Form 5305-SEP, Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement
• Form 5305A-SEP, Salary Reduction Simplified Employee Pension—Individual Retirement Accounts Contribution Agreement
• Form 5304-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—Not for Use With a Designated Financial Institution
• Form 5305-SIMPLE, Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)—for Use With a Designated Financial Institution

Your business may manage other retirement accounts, such as profit-sharing, 401(k), or defined benefit plans. Plan on keeping the plan documents, adoption agreements, and all plan amendments in your employees' files.

Affordable Care Act Documents

Signed into law in 2010, the Affordable Care Act (ACA) was designed to make healthcare more accessible and affordable for Americans. It also helped reshape healthcare benefits through a series of regulations. Below are some of the ACA documents you’ll need to store:

• Form 1095-B, Health Coverage
• Form 1094-B, Transmittal of Health Coverage Information Returns
• Form 1095-C, Employer-Provided Health Insurance Offer and Coverage
• Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns

How Long to Keep Payroll Records

Keep employee payroll records for at least three years. This Fair Labor Standards Act (FLSA) rule applies when deciding how long to keep timesheets and other payroll documents. Your files should include:

• Names, addresses, and Social Security numbers of all employees
• Workweek start and end dates
• Exempt/Non-exempt status
• Pay rate
• Hours worked each day/total hours worked each week
• Overtime earnings (if applicable)
• Total wages paid each period
• Additions to or deductions from wages (including garnishments)
• Payment dates and pay periods

Are Timesheets Legal Documents?

Timesheets are the records employees need to access when settling compensation disputes with their current or former employer. As such, they qualify as legal documents under US law.

Many state personnel file laws allow employees to request information from their records, even after termination or resignation. If your organization operates in multiple states, make sure your filing system handles payroll-record retention by the standards for each state.

Top Payroll Record Keeping Options

Generally, employers may use their preferred employee records system as long as it's lawfully and accurately maintained. Here's an overview of the most common options:

Paper Forms and Timesheets

There are two main challenges to keeping effective payroll records. First, there’s the process of working through the sheer scope of documentation required for every employee (as evidenced in this post). Second, even when these documents are produced and filed correctly, it can be hard to access them when needed.

While paper forms and physically signed timesheets may work for the smallest organizations, the process quickly becomes infeasible as more employees join. There’s also a cost involved in paper storage. How much would it cost you to print out all the forms listed in this article? How many square feet of office space would you need to store these documents?

Payroll Software

Automating this process through time tracking, electronic signatures, and cloud-based document storage removes the physical roadblocks and helps lessen human error. Instead of spending working hours tracking down a former employee’s file in a room full of filing cabinets or among the 1,254 files on the local server, payroll professionals can rely on their HR software to produce the document they need in a few clicks.

So, no matter how long you have to keep payroll records, the right combination of payroll software and strategy can create more physical and mental space to stay organized.