How Long Should You Keep Payroll Records?

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Maintaining important documents is one of the most important tasks you’ll have as a business owner. If you own a small business, this means you have to wear the hat of the owner and HR department.

Unless, of course, you’re expanding and can afford to hire personnel to run this for you. Either way, you need a system in place that ensures all essential business records are kept securely for the required length of time.

If you don’t already know the guidelines for how long to keep payroll records, then this guide should help.

Let’s take a look at the requirements to ensure you don’t end up in hot water with government agencies or the courts.

Documents to Keep On Hand and For How Long

Some employee documents aren’t necessary to keep longer than a year. For instance, job applications and interview records.

Payroll documents, on the other hand, require you to keep them at least three years (in most cases). Here’s a quick list of the payment-related documents you need to retain and for how long:

  • Hiring documents – 3 years
  • Time cards – 3 years
  • I-9 documents – 3 years
  • Employee handbook – 3 years
  • FMLA leave details – 3 years
  • Termination details – 3 years
  • Paystubs – 4 years
  • Tax documents (W-4s, 1099s, etc) – 4 years
  • Retirement income (401K plan records) – 6 years
  • Other records related to employment dispute and payment – varies

The only document you have to keep for two years are merit increases and pay grade details for each employee.

Of course, tax documents have their own time frame for retention as well.

You’ll find that holding onto all of the above documents could potentially get you out of a termination dispute. But more on that later.

Payroll Document Retention By State

It’s important to note that the guidelines for document retention vary state by state. In most cases, states follow the guidelines given by the Department of Labor (DOL).

In areas like Washington, New York, California, and Illinois, there are separate requirements.

For example, in New York, you’re required to keep payroll records for six years (based on the Wage Theft Prevention Act). Then in Washington state, the requirement is 3 years, but the documents you have to retain are more detailed.

Those who don’t abide by the rule could end up paying a $250 fine per offense.

California requires business owners to retain payroll documents for six years, while Illinois requires you to keep them for five years.

Be sure to keep a close eye on your state’s laws, since they do change periodically.

Payroll Records You Should Shred

Thankfully, you don’t have to keep every payroll-related document. Imagine how much space this would take up and the headache of keeping track of it all (especially if you’re using paper-based methods).

Surprisingly, there are risks associated with keeping certain records for too long.

Some examples of documents you want to shred up include bank account details, credit reports, and copies of social security cards.

The same goes for I-9 forms, which you should shred after three years.

Obviously, you don’t want these documents being stolen by identity thieves. This would present a host of legal actions filed against you if so.

While we’re on the topic of document security, let’s take a look at how you should store payroll records.

Properly Storing Payroll Records

There are three ways you can store payroll records – offsite, onsite, or online. The latter is one of the most secure ways you can maintain your payroll records.

This is especially true if you’re using a secure platform like Xodo Sign. You can use this tool for signing important documents, including HR and financial records.

All of the data’s stored in the cloud, which means you can access them anywhere you have internet. You’ll never have to worry about the documents being lost or stolen.

But if you’re not sure the best method of retaining your payroll documents, this may help.

Paper-Based Document Retention

If you decide to use this method, you have to either decide to keep it stored somewhere onsite. Or find an offsite location to store it.

Either way, you have to guarantee the security of these documents. This can become an issue in the event there’s a fire, vandalism, burglary, or flood.

Losing these crucial documents will fall on your shoulders as the business owner since it’s up to you to ensure you preserve these documents.

The only way around this is to have multiple copies of each document stored in multiple locations, which can be costly.

Electronic Storage for Document Retention

Alternatively, you can use software to store documents you create and scan into the computer. Xodo Sign allows you to scan documents into the platform for storage and signatures.

Or you can upload documents you create on your computer.

You can send and receive these documents securely using encrypted technology. This saves you money since you don’t have to worry about printers, papers, ink, and physical storage devices.

All you need is an internet connection to access your stored payroll documents. Then when it comes time to eliminate documents, you can easily do so at the click of a button.

What Entities Dictate Payroll Document Retention?

It’s good to know the agencies responsible for the guidelines of payroll document retention. The agencies you become acquainted with include the Department of Labor and the IRS.

The DOL Wage and Hour Division and the Fair Labor Standards Act (FLSA), require you keep all payroll documents for at least three years. It’s not picky about the documents you have to keep, but there are certain details you need to retain.

You can find those details on records, such as paychecks, hiring documents, time cards, or paystubs, such as:

  • Full name of employee
  • Complete address and zip code
  • Social security number
  • Gender
  • Job function/title
  • Hours worked
  • Hourly/salary rate
  • Pay type (commission, salary, hourly)
  • Total net earnings
  • Payment date
  • Pay period
  • Type of earnings (overtime, regular, and additional)

The IRS, on the other hand, is more particular about how long to keep payroll records and other financial documents.

For instance, tax document retention is at least four years. This includes W-2s, W-4s, and payroll tax payments. You have to retain them even if they return undelivered.

If there are tax deductions on the return, then you have to keep the document for four years. It’s also a good idea to keep paper pay stubs for about four years (unless you’re using electronic storage).

What You Need to Know About the EEOC

The EEOC (Equal Employment Opportunity Commission) has its own guidelines for retaining payroll documents. This is to ensure that these documents are readily available in the event an employee (or past employee) sues a company for discrimination.

In 2017, there were approximately 99,109 charges resolved by the EEOC.

Generally, you have to keep payroll records for between one and three years. Unlike with the other agencies, the EEOC requires you to keep a record of changes in pay rate (to help combat discrimination).

Under the EEOC, you have to keep job evaluations for about two years. This is the same time frame employees have to review their evaluation and either accept it or file a dispute for a salary increase.

So be sure to keep on hand pay scales and pay increases.

What You Need to Know About ERISA

ERISA (Employee Retirement Income Security Act) deals around retirement plans and accounts. This agency has guidelines that cover how long you should keep records of retirement payments, 401K plans, and so on.

These documents require six years of retention. Then you have to keep payment records for as long as you can in the event there’s an audit of the retirement plan.

This includes enrollment document, payroll deductions, and payment documents.

Properly Destroying Payroll Documents

Now that you know all about the payroll documents you must keep on file, it’s time to learn how to properly destroy them when the time comes.

If you’re using paper-based storage, then shredding is the preferred method for data destruction. You can either do this at your office or hire a company to pick up the papers and destroy them for you.

However, if you’re using electronic storage, then all you have to do is delete it from the cloud.

Just be sure to keep a log of all the documents you destroy, when, and how. Sign or initial and date the log each time.

Don’t Neglect the Payroll Records Retention Guidelines!

You’re on the right track so far – learning all about which payroll records to keep and for how long. Now, you have to stay abreast of the law changes in your state.

Keep in mind that electronic storage is one of the best storage options for payroll records.

Also, let us know in the comments if you have other tips for safeguarding important business documents!