Payroll records retention: What do you keep and for how long?

As a small business owner, you’re one of over 6 million employers who keep the economy moving forward. And with great power comes great responsibilities, including retaining your payroll records. It doesn’t matter if you are a bootstrapped startup or a family-owned firm celebrating 125 years in business, a number of federal laws require you to keep payroll records on file.

As a rule of thumb, employers are required to retain some payroll records for at least four years, but some experts say it’s a good idea to hang onto your files even longer. Different federal agencies set the rules, and while you definitely don’t have to hang onto your pay stubs and tax forms forever, there may be some reasons to store your records longer than the statutory minimums. You should talk to a tax or employment law expert if you’re at all unsure about your obligations.

With that said, let’s review the basic rules for which records you need to retain, how long to hold on to them, and a few of our experts’ ideas for keeping them organized.

How long does the IRS require you to retain payroll records?

The IRS says you must keep records related to employment taxes for at least four years after your last completed tax filing — whether those filings are annual or quarterly. You’ll need records to be available should the IRS choose to conduct a review. Here is what you need to keep records of:

• Your employer identification number (or EIN)
• Any amounts and dates of all wages, annuities, and pension payments
• Amount of tips reported to you by employees who receive them
• Fair market value of in-kind wages paid
• The names, physical addresses, social security numbers, and jobs of your employees
• Employee copies of Form W-2 — if they came back to you in the mail as undeliverable
• Dates of employment
• Periods that employees were paid while absent from work due to sickness or injury, and the amount and weekly rates you or third-party payers made to them
• Dates and amounts of tax deposits you made
• Copies of returned files
• Records of allocated tips
• Records of fringe benefits provided, included substantiation
• Duplicate copies of tax returns/tax deposits
• Returned copies of Form W-2
• Canceled/voided checks or reversed electronic payments
• Employee’s name/address/occupation/social security number
• Amount/date of payments for wages, annuities, pensions, tips; fair market value of wages‑in-kind
• Record of allocated tips
• Amount of wages subject to withholding
• Taxes withheld (and date if different from pay date)
• Copies of Form W-4 (for at least four years after the date the last return was filed using the information on the Form W-4)
• Agreements to withhold additional amounts

How long should employers keep Form W-2?

To remain compliant, the IRS recommends that employers keep records of employee copies of form W-2 (and W-2c) that were returned to you as undeliverable for four years after your last completed tax filing — whether that filing is annual or quarterly.

This may sound like a lot of information, but most of it should either be contained within the various employment tax forms you file with the IRS or documented in your bookkeeping if you keep a clean general ledger. We also have an comprehensive guide if you are looking for more information on payroll processing.

How long does the FLSA say you must keep payroll records?

The (Fair Labor and Standards Act) FLSA says to retain payroll records for a minimum of three years for each non-exempt worker. Note that while the FLSA does not have specific instructions on how you organize your files, their website states, “records must be kept at the place of employment or in a central records office.” Here is the list of documents to keep, including employment records:

• Employee’s full name and social security number
• Physical address, including the zip code
• Date of birth, if the individual is younger than 19
• Sex and occupation
• Both the time and day of week, when the employee workweek begins
• Hours the employee works each day
• Total hours worked each week
• Basis on which an employee’s wages are paid (some examples you could provide):
• Hourly pay rate: $11 per hour, Weekly: i.e. $440 per week or piecework
• Regularly hourly pay rate
• Total daily or weekly straight-time earnings
• Total overtime earnings for the workweek
• All additions to or deductions from the employee’s wages
• Total wages paid each pay period
• Date of payment and the pay period covered by the payment

One more record

According to the US Citizenship and Immigration Services (USCIS), you’ll also need to keep a completed I-9 form for each employee on your payroll for three years after their date of hire or one year after the date of termination — whichever is later.

How long do you keep records used to calculate wages?

Separately, the FLSA requires that you hold onto the records that wage computations are based on for two years. So — any and all — documents you use to calculate payments for your employees. The FLSA lists out some examples to give you an idea of what these records should include:

• Wage rate tables
• Timecards and piece work tickets
• Work and time schedules
• Records of both: additions to OR deductions from wages

Next on the list, the US Equal Employment Opportunity Commission (EEOC) also has rules on records related to wages: “employers must keep for at least two years all records (including wage rates, job evaluations, seniority and merit systems, and collective bargaining agreements) that explain the basis for paying different wages to employees of opposite sexes in the same establishment.”

• Wage rates
• Job evaluations (such as performance reviews)
• Seniority and merit systems
• Collective bargaining agreements

Payroll records pro tip

“Keeping files in one spot can save you from hunting around for documents. It’s important because the IRS doesn’t always provide tons of time to prepare for an audit. You may have a matter of days or weeks. So, a little organization can cut down on adding extra anxiety to a stressful situation.”

— Kelly Long, former OnPay Senior Product Consultant and CPP

Are there retention system requirements for storing payroll records?

You’re free to choose the retention system that works best for you, and many employers are heading in a digital direction for record-keeping. Also, some industry experts agree it can be a good move, including Rachel Grantham, a payroll and accounting professional with over 20 years of experience. According to Rachel, retaining records digitally has its advantages:

• Electronic record storage allows you to organize each specific payroll period with all relevant documentation in a quick and accessible format for any audit purposes.
• Going paperless prevents the possibility of losing paperwork or misplacing any physical file folders. Using a standard naming convention for records makes saving documents easy and convenient.
• Choosing an electronic storage method over paper filing can also affect your bottom line by saving on any unnecessary document storage costs.

If you have always held onto hard copies of your payroll records and want to go digital, it can be as simple as scanning all your documents and saving them electronically. Or you can switch to a digital platform and hang onto your paper records for four years (or as specified above). Once the retention requirements have passed, you’ll be able to rely on your digital records going forward.

If you’re just getting your business off the ground — or rethinking how you want to organize your recordkeeping — it doesn’t need to be complex. For some pointers, we caught up with Kelly Finn, a certified payroll professional (CPP) with over ten years of industry experience. According to Kelly, here are some ideas that could be worth considering:

• It can be helpful to create individual employee folders for storing documents — organized in alphabetical order — by employee last name. For example, instead of a folder just to file all 401(k) documentation, or a separate folder that holds all performance reviews, file these records in each employee folder.
• The system works whether you organize files electronically or on a secure server. Or if you prefer to keep hard copy paperwork and folders for each employee in a filing cabinet or other storage container.
• I-9 forms must be filed separately. An I-9 is a document that proves a person is eligible for work in the US and only certain authorized parties should have access to it. It can be a good idea to store each employee’s I-9 record in one separate folder.
• Keeping files in one accessible location can also be helpful for your employees. They can reference items such as new hire packets, any policy documentation, or if they need to provide proof of when their insurance was activated.

Why should you retain payroll records?

At the risk of sounding like a broken record, keeping payroll documents on file — and easily accessible — is a big deal since federal, local, and state laws require it. So, getting a handle on retaining them can help you stay compliant and avoid breaking the law. Also, you never know if you may need them down the road.

For example, what would happen if you were subject to an audit by the IRS? Or maybe a former employee decides to bring legal action against you? In the unlikely event you need these documents to defend yourself, getting organized can provide peace of mind and keep any surprises from being too disruptive.

Did you know?

28% of small businesses have been audited or received a notice from the IRS.