Editorial · June 12, 2020
Payroll Records Retention: How Long to Keep Them
Payroll records retention is the rule that tells an employer how long to keep pay records before throwing them out. Federal law sets two main clocks, and the longer one is four years.
The short answer
Keep payroll records for at least three years. Keep the records behind your wage math for two years. Keep employment tax records for at least four years. When two rules cover the same paper, follow the longer one. A four-year habit covers all three federal rules.
These are federal minimums. Your state may ask for more, and some states do. Check with your state labor department before you set a schedule.
What the Department of Labor requires
The Fair Labor Standards Act, or FLSA, sets the federal minimum wage and overtime rules. Its recordkeeping rules sit in 29 CFR Part 516. They apply to every covered employer and every non-exempt worker.
The Department of Labor says an employer must keep payroll records for at least three years. The same three years apply to collective bargaining agreements and to sales and purchase records.
The records behind the wage math can go sooner. Time cards, piece work tickets, wage rate tables, work schedules and records of pay additions or deductions must be kept for two years.
The law does not demand a special form. It does demand that the records are accurate. You may keep them where people work or in a central records office. The Wage and Hour Division may ask to inspect them, so keep them where you can find them.
What the IRS requires
The IRS has its own clock. In Publication 15, the Employer's Tax Guide for 2020, it tells employers to keep all records of employment taxes for at least four years. Those records should be ready for IRS review.
That four-year rule is longer than both DOL clocks. For most small employers it becomes the working rule for payroll files.
The IRS lists what the file should hold. It includes your Employer Identification Number, the amounts and dates of all wage payments, and each employee's name, address, Social Security number and job. It also covers the dates of employment for each worker, and any W-2 copies returned as undeliverable.
Which records to keep
Put the two lists together and a payroll file looks like this.
- Identity and job: full name, address, Social Security number and occupation for each worker.
- Time: hours worked each day and each workweek, and the day the workweek starts.
- Pay: the pay basis, such as an hourly rate or a weekly salary, plus regular and overtime earnings.
- Changes to pay: every addition to or deduction from wages, and the total paid each pay period.
- Dates: the date of each payment and the pay period it covered.
- Tax paperwork: Forms W-4, copies of the returns you filed, and the dates and amounts of your tax deposits.
- Benefits: records of fringe benefits and expense reimbursements, with proof.
A simple schedule you can use
One rule is easier to follow than three. Many employers pick the longest clock and apply it to the whole payroll file.
- Set a four-year minimum for every payroll and tax record.
- Label each year's file by the year the pay was made, so you know when it ages out.
- Keep time cards with the payroll register they feed, so the two never get split up.
- Store files in a spot where you can find them fast if an auditor asks.
- Write the schedule down, and review it once a year.
Paper takes space, so many small firms scan their records. The DOL rule asks for accurate records and says they must be open for inspection. Whatever format you choose, make sure you can produce a clear copy on request.
Common mistakes
The first mistake is tossing time cards after a few months. The DOL rule asks for two years. The second is mixing up the clocks and applying the shortest one to everything. The third is losing track of who has the records when payroll is run by an outside provider. The duty to keep them stays with you.
Last, do not assume your state matches the federal rule. Some states ask for longer retention, so confirm it before you purge anything.
This article is general information, not legal advice. How long you must keep pay records depends on your state and your staff, so your payroll provider, accountant or state labor office can confirm the exact rule.