The subject of payroll has been top-of-mind for business owners this year. The COVID-19 pandemic triggered economic changes that caused considerable fluctuations in the size of many companies’ workforces. Employees have been laid off, furloughed and, in some cases, rehired. There has also been crisis relief for eligible businesses in the form of the Paycheck Protection Program and the payroll tax credit.
Payroll recordkeeping was important in the “old normal,” but it’s even more important now as businesses continue to navigate their way through a slowly recovering economy and ongoing public health crisis.
Most employers must withhold federal income, Social Security and Medicare taxes from their employees’ paychecks. As such, you must keep records relating to these taxes for at least four years after the due date of an employee’s personal income tax return (generally, April 15) for the year in which the payment was made. This is often referred to as the “records-in-general rule.”
These records include your Employer Identification Number, as well as your employees’ names, addresses, occupations and Social Security numbers. You should also keep for four years the total amounts and dates of payments of compensation and amounts withheld for taxes or otherwise — including reported tips and the fair market value of noncash payments.
In addition, track and retain the compensation amounts subject to withholding for federal income, Social Security and Medicare taxes, as well as the corresponding amounts withheld for each tax (and the date withheld if withholding occurred on a day different from the payment date). Where applicable, note the reason(s) why total compensation and taxable amount for each tax rate are different.
So much more
A variety of other data and documents fall under the records-in-general rule. Examples include:
- The pay period covered by each payment of compensation,
- Forms W-4, “Employee’s Withholding Allowance Certificate,” and
- Each employee’s beginning and ending dates of employment.
If your business involves customer tipping, you should retain statements provided by employees reporting tips received. Also carefully track fringe benefits provided to employees, including any required substantiation. Retain evidence of adjustments or settlements of taxes and amounts and dates of tax deposits.
Follow the records-in-general rule, too, for records relating to wage continuation payments made to employees by the employer or third party under an accident or health plan. Documentation should include the beginning and ending dates of the period of absence, and the amount and weekly rate of each payment (including payments made by third parties).
Last, keep copies of each employee’s Form W-4S, “Request for Federal Income Tax Withholding From Sick Pay,” and, where applicable, copies of Form 8922, “Third-Party Sick Pay Recap.”
Proper and comprehensive payroll recordkeeping has become even more critical — and potentially more complex — this year. Our firm can help review your processes in this area and identify improvements that will enable you to avoid compliance problems and make better use of this valuable information.