The Burden of Payroll Record Maintenance

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Paying employees means more than just issuing checks.  Your company also needs to keep accurate records for current and past employees for a certain period of time.  There are record requirements from both the IRS and the U.S. Department of Labor, which enforces employment rules for several other federal agencies.

These records include the following information: name, address, occupation, and Social Security number, as well as details of compensation such as the dates paid, tips, non-cash payments, compensation subject to withholding and payroll taxes, pay period, and fringe benefits provided to employees.  In addition, you must keep copies of all pertinent federal forms filed.

To further complicate matters, there are numerous state, local, and other regulatory agencies that may require additional recordkeeping.  For example, various government agencies enforce their own laws involving unemployment insurance, wage and hours, child support, creditor garnishment, and unclaimed or abandoned wages.

Without the proper records, your company will be unable to comply with regulatory requirements.  If you are subsequently audited by federal, state or local agencies, you could be hit with back taxes, interest and penalties.

Burden of Proof

The burden of proof, or the responsibility to substantiate items on your tax returns, such as payroll and payroll-related costs, at one time rested entirely on the taxpayer.  Since the passage of the Internal Revenue Service Restructuring and Reform Act of 1998, the burden has shifted to the RIS in the event of a courtroom proceeding, but only if you meet the requirements to retain proper records and make them available for inspection.  So while the law now takes some of the heat off taxpayers, it only applies if your company diligently maintains records and cooperates with reasonable IRS requests.

Obviously good records are vital but maintaining them is a daunting task.  Many businesses solve this problem by outsourcing payroll.  A payroll service provider can relieve your business of the many headaches involved in preparing paychecks and reporting to government agencies, and it can also store your documentation and provide you with reports as needed.  Recordkeeping is just one more reason why outsourcing payroll makes sense for so many businesses.

Payroll Record Guidelines

  • Employee earnings – Maintain a minimum of four years to meet various state and federal requirements.
  • Employee time cards – Keep for at least three years if your business is subject to the Fair Labor Standards Act (engaged in interstate commerce), although it’s a good practice for all businesses to keep the files for several years in case questions arise.
  • Personnel records – Retain three years after an employee has been terminated.
  • Employment tax records – Keep four years from the date the tax was due, or the date it was paid – whichever is longer.

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