Everything you need to know about payroll records in the U.S.

Payroll is one of the most important business functions, and there are many tasks and obligations related to it. While the focus is primarily on the actual payroll process itself, i.e. calculating wages and deductions and issuing wage payments to employees, payroll doesn’t end with wages and salaries hitting employees’ bank accounts. What happens before and after the actual payroll run is equally important, since that’s the moment where employers and payroll teams have to make sure they comply with additional payroll-related requirements such as rules for recordkeeping. 

Recordkeeping in payroll is a legal requirement in many countries all over the world. In the U.S., however, employers may find it particularly challenging to maintain records about employee pay, taxes and benefits because there are numerous government authorities and legal frameworks that dictate what records to keep and for how long to keep them. In this blog post, we’ll answer all your questions about payroll records in the U.S. 

Payroll records is the umbrella term for all payroll-related documents employers have to collect and store for their employees. Employee payroll records include a variety of different documents and information, ranging from employee paychecks to tax information to  salary and working hours. 

In the U.S., payroll record keeping requirements are governed by federal as well as by state regulations. On federal level, it’s the Fair Labor Standards Act (FLSA) that mandates employers to keep certain records for each individual employee, along with the Age Discrimination in Employment Act (ADEA). The two acts are enforced by the U.S. Department of Labor (DOL) and the Equal Employment Opportunity Commission (EEOC). Further guidelines are set out by the Internal Revenue Service (IRS). 

As mentioned before, payroll records need to be kept for each individual employee and must therefore include a range of employee-specific information as well as information on the hours worked and the amount of wages earned during these hours. According to the U.S. Department of Labor, employers should keep at least a record of the following basic information for each employee: 

• Social security number and full name of the employee

• Full address, including zip code

• Birth date - only applies to employees younger than 19

• Gender

• Occupation

• Beginning of the employee’s workweek

• Hours worked during each day

• Hours worked over the course of the full workweek

• Pay basis (e.g. hourly, weekly, commission)

• Basic hourly pay rate 

• Total daily/weekly earnings (excluding overtime)

• Overtime pay for each workweek

• Additional pay or fringe benefits provided to the employee

• Any deductions made from the employee’s wages, including wage garnishments, union fees etc.

• Total amount paid out to the employee for each pay period

• Pay period and pay date for each payment made to the employee 

The FLSA doesn’t require payroll records to be in a specific form – as long as all of the above-mentioned information is kept for each employee covered under the act. But payroll records typically include the following pay- and employee-related documents: 

• Timesheets

• Bank details for each employee

• Hiring and employment documents, including offer letter, background checks, references, signed policies and agreements etc.

• Payroll registers

• Employee leave records (including paid as well as unpaid leave)

• Paystubs

• Tax documentation

Documents falling into the last category include copies of employees' and recipients' income tax withholding certificates (i.e. forms W-4, W-4P, W-4S and W-4V), filed tax returns and forms and more. A complete list of the records that need to be kept with regard to employment taxes can be found on the IRS’s website.

Further payroll-related documents that need to be kept by employers include information on employee benefit plans, pay scales and merit systems. The latter are part of the EEOC’s recordkeeping requirements. 

Keeping payroll records in the U.S. is a legal requirement. Both the Fair Labor Standards Act and the Age Discrimination in Employment Act establish a legally binding requirement for employers to maintain detailed payroll records – not to forget that there are also regulations on state level regarding recordkeeping in payroll. If requested, the records must be presented to government authorities for inspection. 

Also, it’s not uncommon for employees to ask for proof of employment or income, for example when applying for a loan. Providing the necessary documentation is a lot easier if records related to payroll, wages and more are well-maintained. The same goes for the preparation of financial statements which can be done much quicker if all documents are kept in one central place. 

Employee payroll records, especially tax records, are further required in case the business becomes subject of an IRS audit. What’s more, keeping payroll documents well organized will also help employers comply with gender pay gap reporting regulations and makes it easier to collect the necessary data to file the annual EEO-1 report with the Equal Employment Opportunity Commission. 

On top of these legal and tax reasons, having payroll records readily available can also benefit the business directly. Well-kept payroll records can, for instance, help protect the business against legal claims for incorrect payment, and detailed payroll data can be used for strategic purposes, such as better budgeting.

The FLSA clearly establishes that employee payroll records must generally be kept for a period of no less than three years; however, there are some exceptions to the rule. Time cards, work schedules and deduction information, for instance, must only be kept for two years instead of three. A detailed overview of the legal framework can be found in this factsheet published by the U.S. Department of Labor. A different retention time frame applies to tax-related documents. The IRS requires employers to “[k]eep all records of employment taxes for at least four years after filing the 4th quarter for the year”. 

As a rule of thumb, employers should remember that documents used for wage determination are to be kept for two years, employee payroll records for three years and tax forms and documents for four years. In addition, employers should be aware that there are differences in the rules for payroll record retention by state. For instance, the state of Hawaii requires employers to keep payroll records for at least six years, which is twice as long as mandated by federal rules.

Following the FLSA’s official recommendations, payroll records are to be kept at the employee’s place of employment or in a central office where records for the organization’s entire workforce is kept. The important thing to remember is that paper records should be kept in a locked filing cabinet since they contain highly confidential information, such as social security numbers. 

Nowadays, however, it’s common for businesses to keep digital payroll records, i.e. either storing them on external hard drives or using cloud storage solutions. Not only does digital record-keeping solve the storage space problem – especially large enterprises with thousands of employees will quickly run out of storage space when keeping paper records for their payroll and employee data – but it’s also more secure. 

Paper records could get lost in a fire, destroyed during a natural disaster or stolen from company premises. With cloud storage, on the other hand, physical loss or theft is not an issue anymore, which is why it’s the recommended option for businesses of all sizes.

Once the legally required recordkeeping period is over – respecting federal as well as state and local regulations – businesses should dispose of their old records. Not only does disposing of old records free up storage space (both digital storage space as well as space in the filing cabinet), but it also means reducing the amount of sensitive data could potentially be subject to theft or fraud.

Since payroll data is highly sensitive, however, payroll records cannot simply be thrown away. Instead, they need to be disposed of properly. Paper records must be shredded thoroughly, and digitally kept documents must be deleted permanently from all systems.

To sum up, here are a few tips and best practices to keep in mind when it comes to payroll recordkeeping. 

• Be familiar with the federal rules for recordkeeping in payroll and also check for state and local regulations which can impose longer retention times than the FLSA or the IRS.

• Stay organized by using a standardized payroll record file template. 

• Whether you decide to keep paper or digital copies, make sure to choose a secure location for your records.

• Digital recordkeeping has many advantages compared to storing paper records. Among the digital recordkeeping solutions, cloud-based solutions offer the highest security and protection standards. 

• Always keep records up to date. 

• Don’t keep payroll records for longer than necessary and properly dispose of records.

Please note: When working with a payroll service provider, it’s ultimately the employer’s responsibility to collect and maintain payroll records, which means that employers have to make sure to obtain the necessary documentation from their payroll partners. Hiring employees in the U.S. through an Employer of Record (EOR), however, will take the responsibility of keeping payroll records entirely off your shoulders. 

Interested in knowing more about how an Employer of Record helps businesses fulfill all their employer obligations in foreign countries? Book a demo with our expert team to find out more.