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View Full Version : IRS Reviews Time Period for Keeping Payroll Records 4/24/2015



Paul Mayer
04-14-2015, 05:27 PM
Another W-2 filing season has come and gone. First quarter2015 returns will soon be filed. Now may be a good time to think about what payroll records you can get rid of. You can find that information in the Spring2015 issue of the SSA/IRS Reporter [SSA/IRS Reporter, Spring Cleaning of YourPayroll Records, Spring 2015].

Income, Social Security and Medicare Taxes: Employers must keep certain 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. This information includes:
•the employer identification number (EIN);
•the employee's name, address, occupation, and SocialSecurity number;
•the total amount and date of each payment of compensation,and amounts withheld for taxes or otherwise (including reported tips and thefair market value of non-cash payments);
•the amount of compensation subject to withholding for federal income, Social Security, and Medicare taxes, and the corresponding amount withheld for each tax (and the date withheld if withholding occurred on a different date than the payment date);
•the pay period covered by each payment of compensation;
•the reason(s) why the total compensation and taxable amountfor each tax rate are different, if applicable;
•the employee's W-4 form;
•each employee's beginning and ending dates of employment;
•any statements provided by the employee reporting tips received;
•fringe benefits provided to employees and any required substantiation;
•adjustments or settlements of taxes;
•amounts and dates of tax deposits; and
•copies of returns filed (on paper or electronically), including: (a) Forms 941 (and any schedules), 943, 944, 945, 941-X, and W-3;(b) Copy D of Form W-2; and (c) any W-2 forms sent to employees but returned as undeliverable (the originals may be destroyed if the undeliverable forms are electronically reproduced).

Employers should also follow the four-year record-keeping requirement rule for wage continuation payments made to employees by an employer or third party under an accident or health plan. These records 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). Employers should also keep copies of the employee's Form W-4S, Request forFederal Income Tax Withholding From Sick Pay, and, where applicable, copies of Form 8922, Third-Party Sick Pay Recap.

Claims for refund of withheld tax. Employers that file a claim for refund, credit, or abatement of withheld income and employment taxes must retain records related to the claim for at least four years after thefiling date of the claim.

Fringe benefit records. Code Sec. 6039D(b) requires employers with a health insurance, cafeteria, educational assistance, adoption assistance, or dependent care assistance plan providing benefits that are excluded from income to keep whatever records are needed to determine whether the plan meets the requirements for excluding the benefit amounts from income.


Observation: Code Sec. 6039D(b) does not specify how long records pertaining tospecified fringe benefits should be kept. Presumably, they are subject to the four-year rule under the “records in general rule” in Reg. ยง 31.6001-1(e), and,thus, should be kept at least four years after the due date for the return period that includes taxes related to the benefits, or the date the tax was paid, whichever is later.

Record keeping requirements for tip allocations. Employers must 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.

Unemployment tax records. Employers subject to federal unemployment tax must keep records for at least four years after the due dateof Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return, or the date the required FUTA tax was paid, whichever is later, with respect to: (i)the total amount of employee compensation paid during the calendar year; (ii) the amount of compensation subject to FUTA tax; (iii) 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); (iv) all information shown onForm 940 (with Schedule A and/or R, as applicable); and (v) the reason why total compensation and the taxable amounts are different, if applicable.

Other record-keeping requirements. The federal Department ofLabor (DOL) also requires certain records to be maintained, as do statewage-hour and state unemployment insurance agencies.

Penalties for noncompliance. Employers that fail to complywith federal record-keeping requirements may be subject to sizable penalties and large settlement awards if they are unable to provide the information requested by the IRS, or in an employment-related lawsuit.