It may be time to clean up your old payroll files, and that means figuring out what stays and what goes. Sizable penalties and large settlement awards are in your future if you’re unable to provide required information when requested by the IRS or an employment-related lawsuit. And no one wants that.
So, what documents should you keep? Here's a brief guideline:
- Income, Social Security and Medicare tax records for at least four years after the due date of each employee's personal income tax return — generally for the year in which the payment was made.
- An employee's name, address, occupation and Social Security number; the total amount and date of each compensation, including reported tips and the fair market value of noncash payments; and any amount withheld for taxes or otherwise.
- The amount of compensation subject to withholding for federal income, Social Security and Medicare taxes, as well as the corresponding amount withheld for each tax, including the date withheld if withholding occurred on a different date than the payment date — all this information is key to retain.
- Employees' W-4 forms, any withholding allowance certificates, each employee's beginning and ending dates of employment, any statements provided by the employee reporting tips received, and fringe benefits provided to the employee and any required substantiation.
- Records about adjustments or settlements of taxes and amounts and dates of tax deposits.
- Records regarding wage continuation payments made to any employee on an accident or health plan. Include the beginning and ending dates of the period of absence from work and the amount and weekly rate of each payment, including payments made by third parties.
- Copies of the employee's W-4S form — Request for Federal Income Tax Withholding from Sick Pay. If applicable, also keep copies of Form 8922 — Third-Party Sick Pay Recap. These items must be kept for four years after the due date of the employee's personal income tax return for the year the payment was made.
- Copies of returns filed either on paper or electronically, including Form 941, with Schedule B, D and/or R, as applicable, and forms 943, 944, 945, 941-X and W-3. Copy D of the W-2 form and any W-2 forms sent to employees but returned as undeliverable must be retained for at least four years after the due date of the tax or the date the tax is actually paid. If you can electronically reproduce the undeliverable W-2 forms, destroy the originals.
- Records related to a claim for refund, credit or abatement of withheld income and employment taxes for at least four years after the filing date of the claim.
Keep records regarding health insurance, cafeteria, educational assistance, adoption assistance and dependent care assistance plans providing benefits yet excluded from income if they're needed to determine whether the plan meets requirements for excluding the benefit amounts from income.
Records substantiating info returns and employer statements to employees regarding tip allocations should be retained for at least three years after the due date of the return or statement.