Maintaining payroll records can be a challenge.
Whether you have two employees or two hundred, you need to keep accurate records on each of your workers. The information in their personnel files and payroll records is very important, and it is essential that you keep it up to date and secure.
A lot of small business owners, especially those operating new start-ups, begin by using the old “pen and paper” method of recordkeeping. They track everything themselves, and it works ok for a while. But as their company grows, they quickly find maintaining payroll records and other employee information to be time-consuming and exhausting.
As a CPA firm that has guided hundreds of clients through these murky waters, we have seen plenty of entrepreneurs get overwhelmed with everything they are suddenly responsible for keeping up with. This article will hopefully help you know exactly what records you need to keep and the best ways to do it…so you can get back to running your business instead of shuffling papers.
Record Keeping Basics
We’ll specifically discuss payroll records in a minute. First, though, we have to point out a fundamental truth: The key to any successful effort at record keeping is to have a system.
It’s amazing how many small business owners never take the time to set up an effective way to manage all of the records they have to keep track of. So many times, important paperwork simply gets added to a pile by people who have every intention of sorting through it again at some point in the future. Here’s what can easily happen:
- That point for sorting never comes, and the pile continues to grow.
- Then when a piece of important information is needed, it takes a lot of time and effort to find it.
- That time costs you money.
- The work you could have been doing doesn’t get done…which also costs you money.
Therefore, having a system saves you money!
Pro tip: use the same system for all of your files. That way, you and anyone else on your team who needs to access information can find it quickly and easily without having to learn multiple methods of record keeping.
3 Types of Files You Need to Keep on Every Employee
Every time you hire someone, you need to establish three separate kinds of files on them.
An employee’s personnel file includes all of their personal information such as pertinent biographical information, contact information, and emergency contacts. This is also the place to store their employment history with your company and all of the HR-related forms they would have filled out during their onboarding process.
Side note: If your business uses I-9 forms to verify an individual’s eligibility to work in the United States, you’ll need to keep these in a separate file. In the event that you are audited by immigration officials, you would want to be able to produce the documents they are needing without compromising any other private employee information.
If you offer health and/or life insurance as a benefit to your employees, you would maintain any forms and activity related to those things in this file. This would also be the place to keep injury reports or documentation on the use of the Family Medical Leave Act.
This third category is the one you most likely came here for. This is where you need to store all of the forms related to financial information for each employee. Records kept in this file would include:
- Time Sheets
- Direct Deposits
Maintaining Payroll Records
CRS CPA is an accounting firm dedicated to small businesses, nonprofits, and ag operations. One of our core services is HR & Payroll Support. So while the two file categories above are often part of the discussion as we help clients run their businesses more effectively, maintaining payroll records is where we are most often “hands-on.”
It is also the area of record keeping that can cause you the most problems if not done correctly. So here are our recommendations. We hope they help take some of the confusion and mystery out of maintaining payroll records.
Besides, you deserve to be able to focus on growing your business instead of wondering if your payroll is done right.
What are you required to keep?
The IRS requires, among other things, that you have the following basic information on file for each of your employees:
- Your employer identification number.
- Names, addresses, social security numbers, and occupations of employees and recipients.
- Dates of employment.
- Amounts and dates of all wage, annuity, and pension payments.
Here is a complete list of Employment Tax Recordkeeping required by the IRS. Check with your particular state to find out if you need to keep any additional information on file to meet their requirements as well.
The U.S. Department of Labor also has specific regulations. You can download a PDF related to recordkeeping under the Fair Labor Standards Act here.
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How long do payroll records have to be maintained?
The Department of Labor requires that employers keep the information listed in the PDF referenced above for three years.
Beyond that, the answer to “how long” isn’t cut and dry.
In August 2020, The Motley Fool published a helpful list on how long you should keep employee files. Here are a few of their recommendations:
- Resumes, applications, etc.: 3 years (Other sources say 1 year, and there are no requirements for keeping unsolicited resumes.)
- Employment contracts, signed forms, handbooks, etc.: 1 year
- Payroll records, W-4s, time sheets: 4 to 7 years
- Medical records: 1 year
- Separation records: 1 year
Payroll records are extremely important, and we recommend that you take extra care in keeping them longer than other types of employment documents. (Especially considering how our society seems quicker than ever to file lawsuits.) To be safe, err on the side of keeping these files for the entire duration of a person’s employment with your company and then at least 5 years after that.
When should you call in a professional?
As soon as maintaining payroll records becomes too much for you to handle, it’s time to delegate this essential function of your business to a dedicated professional. Far too much is at stake to risk having inaccurate records and a sloppy system. Even if you are a meticulous person, by the simple fact that you are simultaneously running and growing a business, it’s just not possible for you to do it all yourself.
That’s where CRS CPA can help. For over 40 years, we’ve been helping small business owners just like you with their HR & Payroll, as well as all the other accounting situations they face.
We understand the importance of keeping accurate and accessible records. Our payroll pros can help you through online payroll processing (no more stacks of paper!), tax form preparation, and human resource management.
Schedule a call today and discover what it means to “expect more from your CPA.”
Also check out our other recent blog post on the subject of payroll: 7 Big Misconceptions About Online Payroll Processing You Should Know.