The COVID-19 pandemic has forced many small businesses to reduce their operations, furlough workers and even shut down for a period. But this doesn’t mean employers can allow payroll recordkeeping obligations to lapse. Your business is still responsible for creating and maintaining records for possible inspection by the Equal Employment Opportunity Commission (EEOC) and the Department of Labor (DOL).
Documents to Keep
In general, payroll records refer to the documentation of employee time worked and wages paid for each payroll period. This includes records for salaried and hourly workers, as well as those paid by commission. The payroll records you retain may be required at some point for inspection by the EEOC to investigate an employee complaint, the IRS to ensure tax compliance or by other federal and state government agencies.
Payroll records kept on file for each employee should include his or her:
- Full name,
- Social Security number,
- Home address,
- Birth date, if younger than age 19,
- Gender, and
- Occupation.
They should also include such work-related records as the:
- Time and day of the week when the employee’s workweek begins,
- Total hours worked per day and total hours worked per week,
- Basis on which employee’s wages are paid.
- Regular hourly pay rate, if applicable,
- Total daily or weekly straight-time earnings, if applicable,
- Total overtime earnings for the workweek, if applicable,
- Any additions to or deductions from the employee’s wages,
- Total wages paid each pay period, and
- Date of payment and the pay period it covers.
How long must you keep these payroll records? The two main federal laws affecting retention of payroll records are the Fair Labor Standards Act (FLSA) and the Age Discrimination in Employment Act (ADEA). Both require employers to keep payroll records for at least three years. Furthermore, you must retain records showing how you determined wages (for example, timecards) for two years.
The IRS says you must keep records of employment taxes for at least four years after filing the fourth quarter for the year. This includes Forms W-4, personal information and dates of employment.
Complying with the FLSA
Generally, the FLSA is the controlling federal law concerning work performed by employees. It currently requires employers to pay a minimum hourly wage of $7.25, but many states and municipalities impose higher minimum wage requirements.
Under the FLSA overtime rules, an employer must pay an employee one-and-a-half times the regular hourly rate for any hours worked above 40 hours in the workweek. But this rule doesn’t apply to exempt workers such as salaried executives. It’s critical that you keep detailed and accurate time records for all non-exempt employees.
Note that it’s your business’s responsibility to determine whether employees are exempt or non-exempt. Misclassifying an employee as an independent contractor can result in penalties. The same is true for classifying a non-exempt worker as exempt. Keeping adequate payroll records can help support your position should the IRS question an employee classification.
What the ADEA Requires
The ADEA prohibits age discrimination against workers age 40 or older. Although this law doesn’t protect workers under age 40, some states offer comparable legal recourse for younger workers. It isn’t illegal for an employer to favor an older worker over a younger one, but discrimination may occur when both the victim and the favored employee are over age 40.
Specifically, the ADEA bans discrimination in any aspect of employment, including:
- Hiring and firing,
- Pay and job assignments,
- Promotions,
- Layoffs and furloughs,
- Training, and
- Employee benefits.
It’s also illegal to harass someone because of his or her age. Harassment can include offensive or derogatory remarks about the age of an individual; however, isolated incidents of teasing or offhand comments generally aren’t considered harassment. Instead, harassment is so frequent or severe that it creates a hostile or offensive work environment or results in an adverse employment decision — such as a demotion or employment termination. Discrimination may be caused by an employee’s supervisor, the supervisor of other employees, a coworker or an outside party, such as a client or vendor.
Although the ADEA requires most payroll records to be kept for a minimum of three years, records reflecting wage computations — such as timecards and piecework tickets, wage rate tables, work and time schedules, and records of additions to or deductions from wages, must be retained for only two years. These records should be available for inspection by the DOL. You can maintain them at your principal place of employment or in a central records office.
Important Work
Record-keeping may seem like a thankless administrative task that keeps you or your staff from more important work. However, it’s essential to avoiding or resolving legal and regulatory actions. If you’re unsure about how long you need to hold on to certain records or would like assistance in recording payroll, please contact Director of Client Accounting Services Dominick Bellia via our contact form.
Councilor, Buchanan & Mitchell (CBM) is a professional services firm delivering tax, accounting and business advisory expertise throughout the Mid-Atlantic region from offices in Bethesda, MD and Washington, DC.
