After finishing the year-end payroll processes, it is a great time to start thinking about cleaning up old files. Which records can be destroyed, and which records must be retained? The Internal Revenue Code requires all employers that withhold and pay federal income, social security, and medicare taxes to maintain certain records for each employee. Failure to meet these requirements can result in sizable penal ties and large settlement awards if employers are unable to provide the required information when requested by the IRS or in an employment-related lawsuit.
Income, Social Security, and medicare taxes
Employers must keep income, social security, and medicare tax records for at least four years after the due date of the employee’s personal income tax return (generally, April 15) for the year in which the payment was made, including:
• The employer identification number (EIN).
• Employee name, address, occupation, and social security number.
• The total amount and date of each payment of compensation and any amount withheld for taxes or otherwise. This should include reported tips and the fair market value of non-cash payments.
• Amount of compensation subject to withholding for federal income, social security, and medicare taxes, and the corresponding amount withheld for each tax (also the date withheld if withholding occurred on a different day than the payment date).
• The pay period covered by each payment of compensation.
• If applicable, the reason(s) why the total compensation and the taxable amount for each tax rate are different.
• The employee’s Form W-4, Employee’s Withholding Allowance Certificate.
• Each employee’s beginning and ending dates of employment.
• Any statements provided by the employee reporting tips received.
• Information regarding wage continuation payments made to the employee by an employer or third party under an accident or health plan. This should 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). Employers also need to keep copies of the employee’s Form W-4S, Request for Federal Income Tax Withholding from Sick Pay. If applicable, taxpayers should also retain copies of Form 8922, Third-Party Sick Pay Recap. As with the items listed above, these must be kept for four years after the due date of the employee’s personal income tax return for the year in which the payment was made.
• Fringe benefits provided to the employee and any required substantiation.
• Adjustments or settlements of taxes.
• Copies of returns filed (on paper or electronically), including Forms 941 (with Schedule B, D, and/or R, as applicable), 943, 944, 945, 941-X, W-3, Copy A of Form W-2, and any Forms W-2 sent to employees but returned as undeliverable. If the employer can electronically reproduce the undeliverable Forms W-2, the employer may destroy the originals.
• Amounts and dates of tax deposits.
If an employer files a claim for refund, credit, or abatement of withheld income and employment taxes, records related to the claim must be retained for at least four years after the filing date of the claim. Employers must also keep records substantiating any information returns and employer statements to employees regarding tip allocations for at least three years after the due date of the return or statement to which they relate. Employers with a health insurance, cafeteria, educational assistance, adoption assistance, or dependent care assistance plan providing benefits that are excluded from income must also keep whatever records are needed to determine whether the plan meets the requirements for excluding the benefit amounts from income.
Employers subject to the Federal Unemployment Tax Act (FUTA) must also keep records to substantiate the following for at least four years after the due date of Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, or the date the required FUTA tax was paid, whichever is later:
• The total amount of employee compensation paid during the calendar year.
• The amount of compensation subject to FUTA tax.
• State unemployment contributions made, with separate totals for amounts paid by the employer and amounts withheld from employees’ wages. Currently, Alaska, New Jersey, and Pennsylvania require employee contributions.
• All information shown on Form 940 (with Schedule A and/or R as applicable).
• If applicable, the reason why total compensation and the taxable amounts are different.
Department of Labor, state requirements
There are also record retention requirements set by the Department of Labor (DOL), as well as wage hour and unemployment insurance agencies at the state level. (SSA/IRS Reporter Spring 2015.)
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