As a retailer, you face variety of payroll challenges, like high employee turnover rates constantly changing your payroll and accurately tracking time for hourly or minimum wage employees. On top of those day-to-day tasks, however, you must also abide by federal, state, and local payroll record retention laws.
According to the Internal Revenue Service, payroll records must be retained for a minimum of four years from the time the taxes are due or from the date on which you made the payment (whichever is later). One of the most important reasons to keep payroll records is because they support entries in your books and on your tax returns. In order to comply with payroll record retention laws, you should maintain records on the following information:
- Employer Tax forms (reports) and payment (deposit) receipts
- IRS notification regarding payroll taxes, including the employer’s remittance frequency status
- Amount of tips reported for businesses with tipped employees
- Amounts and dates of all taxable wage, annuity, and pension payments—including bonuses and commissions
- Employee information – addresses, social security numbers, occupations, dates of employment and tax documents (W-4s and W-2s)
State and Local Payroll Tax Retention Laws
State payroll record retention requirements vary, including statutes of limitations. The time period for retaining these documents ranges anywhere from three to eight years. Check your state and local record retention laws to confirm requirements.
The Small Business Administration (SBA) suggests keeping payroll records for up to six years, while legal advice site, Nolo, recommends a slightly longer period of up to seven years. It’s best to consider all the implications that relate to your business before making a decision, and, if you are able, to err on the side of caution and keep the records for the longest recommended time period.
Compliance with Employment Standards
Another critical reason for retaining payroll records relates to employment standards, including the Fair Labor Standards Act (FSLA).
The Department of Labor (DOL) outlines payroll retention requirements in FLSA Fact Sheet #21, which explains that employers of non-exempt workers (those who qualify for overtime) must keep the following records:
- Full, legal name, social security number and address information
- Date of birth for employees younger than 18
- Gender and occupation
- Time and day of week when each employee’s workweek starts
- The total number of hours worked each day and each week
- Payment agreement/status—hourly, salary, full-time, part-time, etc.
- Rate of pay
- Total daily and weekly regular and overtime earnings
- All payroll additions and deductions
- Total wages paid each pay period
- Date of payment and the pay period covered by the payment
The FSLA requires that payroll records be kept for a minimum of three years, while supplemental information (like time cards or rate tables) needs to be kept for two years.
Tax and Compliance Documents
There are several important tax and payroll documents that provide a record of the information required by law. Some of the most important of those documents to retain are:
- W-4, Employee’s Withholding Allowance Certificate
- W-2, Employee’s Wage and Tax Statement
- Form 941,Employer’s Quarterly Tax Form
- Form 940, Employer’s Annual Federal Unemployment Tax Return
- Wage detail reports, submitted quarterly to state unemployment and other tax authorities
- New hire reports, submitted to the state by the employer within a set number of days after making a new hire
- Paystubs, required by more than half of all states
What Happens If You Don’t Keep the Right Payroll Records?
The IRS doesn’t take payroll record retention lightly. It tends to push hard in situations where a retailer demonstrates a pattern of disobedience and neglect. Not properly retaining records can result in the IRS closing your business or taking you to court, and you could potentially face jail time. Take time today to ensure you are maintaining payroll records in a manner that complies with federal, state and local laws. The right point of sale system can take the headache out of the process and ensure that you have everything you need in the event of an audit.
