How Long Do I Need to Keep Payroll Records?

As a business owner, it is crucial to understand the importance of keeping accurate and complete payroll records. Not only does it ensure compliance with federal and state regulations, but it also provides valuable information for auditing purposes and employee verification. According to the IRS, payroll records should be kept for at least four years after filing the associated tax return, but state and local laws can fluctuate depending on location, so it is important to be in the know. So, let’s address several questions related to the retention of payroll records, and what regulations are most relevant to you.

 

What is a Payroll Register?

A payroll register is a document that contains a summary of all employee payroll transactions for a specific period. It typically includes details such as employee names, hours worked, wages paid, deductions, and taxes withheld. The payroll register serves as a vital reference tool for reconciling payroll expenses and can help identify any discrepancies or errors. Learn more about what a payroll register is, and how it affects your business, here.

 

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

The IRS requires businesses to retain payroll records for a specified period. Generally, you should keep these records for at least four years after the date of filing the associated tax return. This includes documents such as employee copies of Form W-2, W-4 forms, timecards, earnings statements, and tax withholding records. It is essential to note that the IRS may conduct audits within this timeframe, so retaining accurate and organized records is advisable.

 

Length of Time	Records to Keep
1 Year	Applications
	Promotions
	Demotions
	Terminations
2 Years	Merit Increases
	Pay grades
3 Years	Hiring documents
	I-9s
	Timecards
	FMLA leave details
	Employee handbook acknowledgment
	Details on why employee separated
4 Years	Paystubs
	W-4s
	Employee tax documents
	Documents related to a payment
5 Years	Background checks
	Drug test results
	Driving Records
	Employment verification
	Letters of reference
	Employee disputes
	OSHA300/300A
6 Years	Retirement plan details
	Benefit plan information

 

What are Payroll Documents and Payroll Files?

Payroll documents refer to various records gathered and maintained by employers for each employee. These may include employment contracts, tax forms, direct deposit authorization forms, benefit enrollment forms, and any other relevant paperwork pertaining to an individual’s employment. Payroll files are physical or electronic folders where these documents are securely stored.

 

Do Employers Keep Records of Past Employees?

Yes, employers should keep records of past employees as part of their ongoing record-keeping requirements. These records should include crucial information such as job titles, dates of employment, pay rates, tax withholdings, benefits received, and reasons for termination. Retaining these records ensures compliance with legal obligations and enables smooth processes during audits or when future employment verifications arise.

 

Employee Records Retention by State

Apart from federal requirements, each state has its own regulations regarding the retention of employee records. Some states may require longer retention periods or have specific record-keeping obligations. It is crucial to understand and comply with the specific guidelines in your state regarding the retention of payroll records. Most states have websites or resources available that provide detailed information on record-keeping obligations by employers.

 

State	Record retention period
Alabama	5 years
Alaska	3 years
Arizona	4 years
Arkansas	3 years
California	4 years
Colorado	3 years
Connecticut	7 years
Delaware	3 years
Florida	3 years
Georgia	4 years
Hawaii	7 years
Idaho	3 years
Illinois	3 years
Indiana	5 years
Iowa	7 years
Kansas	3 years
Kentucky	4 years
Louisiana	5 years
Maine	3 years
Maryland	3 years
Massachusetts	3 years
Michigan	3 years
Minnesota	4 years
Mississippi	3 years
Missouri	3 years
Montana	3 years
Nebraska	3 years
Nevada	4 years
New Hampshire	3 years
New Jersey	6 years
New Mexico	4 years
New York	6 years
North Carolina	3 years
North Dakota	3 years
Ohio	3 years
Oklahoma	3 years
Oregon	3 years
Pennsylvania	4 years
Rhode Island	3 years
South Carolina	4 years
South Dakota	4 years
Tennessee	5 years
Texas	3 years
Utah	3 years
Vermont	3 years
Virginia	3 years
Washington	3 years
West Virginia	2 years
Wisconsin	3 years
Wyoming	4 years

 

Maintaining Payroll Records: Best Practices

To ensure accurate record-keeping and easy retrieval, consider implementing these best practices:

1. Centralize Record-Keeping:

Establish a centralized system, either physical or electronic, to store all payroll records securely. This helps maintain consistency and accessibility across different departments within your organization.

 

2. Regularly Backup Data:

Create regular backup copies of electronic records and store them in a secure location. This practice protects against data loss due to unforeseen circumstances such as hardware failure or cyberattacks.

 

3. Organize and Label Files:

Properly label physical files and folders and maintain a logical structure for electronic records. Categorize documents based on employee name, date, or type of record to ensure easy retrieval when needed.

 

4. Separate Active and Inactive Files:

Differentiate between active employee files and those of past employees. This separation streamlines record-keeping processes and ensures that current employee information is readily accessible while retaining compliance with retention requirements for former employees.

 

5. Dispose of Records Securely:

When disposing of records, whether in paper or electronic format, ensure proper destruction to safeguard sensitive employee information. Shred physical documents and use reputable software to permanently delete electronic files.

 

Proper payroll record retention is crucial for business owners to ensure compliance with federal and state regulations, facilitate auditing processes, and provide necessary information for employee verifications. By understanding the guidelines set forth by the IRS and your specific state, establishing efficient record-keeping practices, and remaining organized, you can effectively manage your payroll records and protect sensitive employee information.