How to manage payroll records: A complete guide

Paying employees accurately and on time is essential for long-term business success, employee satisfaction, and retention. However, payroll processing does not stop once funds hit employees’ bank accounts. 

Recordkeeping is a critical element of payroll management, helping both you and your employees keep track of their earnings and deductions—and good payroll management practices enable you to make more informed budgeting decisions, stay compliant with labour and tax regulations, and build trust with employees and stakeholders.

This guide covers everything you need to know about payroll recordkeeping, including tips and tools to help you manage payroll independently and effectively. 

What are payroll records? 

Payroll records is an umbrella term referring to all documents that contain information about employee earnings. These documents include records on employees’ wage rates, tax deductions, benefits, and working hours. Payroll records are essential for compliance, audits, and dispute resolution. 

Employers are required to keep employees' pay documents for at least three years, regardless of the employee's status. This applies to both exempt and non-exempt workers. 

Why should you keep payroll records?

Payroll recordkeeping is statutory. But beyond that, it helps companies avoid legal issues, promptly detect and act on irregularities, and elevate their collaborations with stakeholders, auditors, and employees, supporting a culture of transparency and trust.

To comply with legal and tax obligations

Both federal and state laws govern payroll recordkeeping, and employers must determine which laws apply to their business to avoid compliance issues. 

• The Fair Labor Standards Act (FLSA) requires employers to keep employee payroll files for at least three years and records related to wage calculations for at least two years. 
• The Equal Employment Opportunity Commission (EEOC) mandates that if an employee is involuntarily terminated, an employer must retain documentation containing the employee's personal and employment information for one year from the date of termination.
• The Employee Retirement Income Security Act (ERISA) specifies in Section 107 that employers must keep records related to employee retirement savings plans for at least six years.

State laws may impose additional or stricter requirements. 

Additionally, retaining employee payroll records is essential for IRS audits and filing tax returns with government agencies. Regularly reviewing and updating payroll documentation ensures compliance with applicable regulations. 

To support employee-related issues

Well-kept payroll records not only help employers comply with the law and manage their budgets effectively. They also support employees in successfully handling personal and private matters.

For instance, employees often need employment records when renting an apartment or applying for a loan. Comprehensive employment files, including details about an employee's pay history, can significantly streamline these processes, making getting a loan or leasing a property easier.  

Also, organized pay stubs that break down employees' earnings help them monitor their pay and detect irregularities. Let's say an employee worked overtime, but those hours were not included in their latest pay stub. Access to payroll records can help them report the issue to their superiors and resolve it promptly. 

To prepare for financial audits and reporting

Payroll records are essential for documenting business expenses, particularly those related to employee compensation. When properly maintained, these records provide comprehensive details about who, when, and how they were paid. 

In the event of a financial audit, proper payroll journal entries can help back up your claims, allowing you to demonstrate compliance with tax and labour laws. These records also help detect discrepancies early and reduce the risk of penalties and fines. 

Additionally, thorough payroll recordkeeping provides valuable insights into labour costs, enables companies to create more accurate financial statements, and makes internal reporting much more manageable.

What should you include in payroll records?

Payroll recordkeeping requirements vary between states and businesses in terms of information needed for creating comprehensive files. Federal and state regulatory bodies offer recommendations on what payroll records should look like. In general, the more detailed the documentation, the better. Consider including the following information:

• Employee’s full name and social security number: Serves as a unique identifier for employee payroll processing and tax reporting
• Employee’s address: Specifies the employee’s official location for correspondence and tax purposes
• Time and day of the week when the employee’s work week begins: Marks the starting point for calculating weekly hours and overtime
• Date of payment and pay period covered by the payment: Indicates when the employee receives their pay and the period it covers
• Hours employee worked each day: Shows the hours the employee worked daily, ensuring compliance with labor laws
• Hours employee worked each workweek: Summarizes the total hours the employee worked weekly for wage calculations
• Employee’s total daily or weekly straight-time earnings: Details the employee’s basic earnings, excluding overtime or additional payments
• Employee’s tax information and documents: Includes details on tax withholdings and forms such as W-4
• Employee’s direct deposit information: Provides an employee's bank account details for timely and accurate wage payments

How long should you keep payroll records?

Businesses are required to keep payroll records for a certain number of years under different laws. For those wondering how long to keep employee files, it depends on federal or state laws and industry requirements. 

Federal requirements for payroll record retention

To ensure compliance with federal laws, employers must adhere to the following requirements: 

• Keep payroll records for at least three years and wage calculation documentation for at least two, as required by the FLSA. 
• Retain payroll tax records for at least four years from the date the tax is due or it is paid, depending on whichever is later, as required by the IRS.
• Keep employee personal and employment records for one year in case of involuntary termination from the termination date, as required by the Equal Employment Opportunity Commission (EEOC).
• Retain documentation detailing employee retirement saving plans for at least six years, as outlined in Section 107 of the Employee Retirement Income Security Act (ERISA).

State-specific payroll record retention laws

Recordkeeping requirements vary between states. While many states follow federal regulations, some have specific requirements that mandate employers to keep employee records longer than the three years specified by the FLSA. Below is the list of states with recordkeeping regulations exceeding federal requirements.

Industry-specific retention policies

Industry-specific recordkeeping policies differ based on the nature of the work, such as healthcare and construction, where additional documentation with information such as project hours or patient care shifts may be required. 

For instance, in sectors with tipped employees, employers may be required to record received tips to ensure compliance with federal and state wage laws. In unionized workplaces, employers are required to adhere to collective bargaining laws and may need to document union dues deductions. 

Finally, in highly regulated industries like finance, employers may be required to create, maintain, and retain detailed payroll records to pass audits and demonstrate compliance with applicable regulations and funding requirements. 

Where should you keep payroll records?

Today, companies can choose between traditional recordkeeping on paper or storing each employee’s documents digitally. Each method has advantages and disadvantages that employers should be aware of when choosing the most suitable solution for their team.  

Cloud-based payroll storage solutions

Cloud-based storage solutions are increasingly used among small and midsize businesses looking for cost-effective solutions that don’t require complex IT infrastructure. Storing payroll records in the cloud is easy and accessible from anywhere as long as you have a stable internet connection. 

However, cloud storage poses challenges, including risks of data breaches and noncompliance with regulations like CCPA and GDPR. Organizations also have less control over data security when relying on third-party service providers. 

Companies can address these risks by selecting providers with strong encryption, security certifications like SOC 2 or ISO 27001, and ensuring compliance with relevant legal standards.

On-premises payroll record storage

Storing payroll documents on-premise involves everything from traditional recordkeeping using paper records stored in file cabinets to more advanced options like a local server. This is an option often favored by larger organizations, or those working with sensitive or confidential information, like governments and financial institutions. 

While it provides a high level of security from external breaches, on-premise storage is a more expensive option that requires extensive organizational and IT resources. It is also at higher risk of damage or destruction in cases of floods, fires, or thefts. 

Integrated payroll and HR software

Companies of all sizes opt for integrated payroll and HR software to streamline employee data management. These solutions allow businesses to store employee data in one place—typically in the cloud—making it accessible to HR and payroll teams. This can enhance their collaborations and provide better employee experiences.

Still, an integrated payroll and HR system may be challenging to learn and use, especially for smaller departments. Both HR and payroll professionals may need to learn additional skills in order to make the most of the software, which can be a drain on organizational resources.

High implementation and maintenance costs may also pose barriers for small and midsize businesses. Finally, storing sensitive data in the cloud introduces potential security risks, from data breaches to reduced control over data due to the involvement of third-party providers. 

Data backup and disaster recovery plans

Data backup and disaster recovery refers to copying and storing data in a specific location and restoring it in the event of a crisis, such as a cyber-attack or natural disaster. 

Data backup involves storing copied business information on an external hard drive or in the cloud. Disaster recovery plans are procedures, methods, and policies used to secure business continuity in the case of a security incident or other type of crisis. For example, many companies have backup servers that automatically take over if the primary data center loses power. 

Although data backups and disaster recovery plans are separate concepts, backup alone is insufficient. Without a sustainable recovery strategy, companies risk delays or loss of documentation in extreme situations. Therefore, businesses should consider pairing these two concepts by implementing regular data backups and establishing a clear disaster recovery plan to maintain operational continuity. 

Best practices for payroll records

There is no one-size-fits-all process for managing payroll records. Still, incorporating the following practices can be a good start in moving toward effective and safe employee data management.

1. Conduct regular audits of records

Regularly reviewing payroll records ensures that all information is up-to-date and accurate. It also helps quickly and easily detect errors and irregularities in wage calculations, tax withholding, and working hours, enabling companies to fix them before they become a bigger issue or lead to penalties. 

2. Use a digital payroll system to streamline storage

Opting for a reliable payroll software makes storing, organizing, and accessing payroll records easier and faster. Payroll software can also eliminate tedious, repetitive work by automating processes—creating records like payroll tax forms, filing them, storing them, and allowing HR managers and employees to access them when needed, just to name a few.

3. Ensure compliance with document retention policies

Laws change frequently, and staying up-to-date with current regulations is of utmost importance for avoiding legal issues and making audits and reporting, both internal and external, stress-free. Recordkeeping requirements vary among states and industries, and there can also be differences between state and federal laws. For that reason, staying informed and understanding recordkeeping regulations ensures smooth payroll operations. 

4. Maintain confidentiality and secure access

Secure sensitive employee payroll data by: 

• Limiting access to authorized personnel only
• Using strong passwords and encryption
• Opting for a secure digital storage solution
• Educating employees on the importance of cybersecurity 
• Incorporating tried-and-true confidentiality practices to avoid accidental data leaks

Payroll file checklist

What documents an employer must keep depends on their industry and state and local requirements. The checklist may include but is not limited to: 

Form I-9, Employment Eligibility Verification

Form I-9 verifies an employee’s identity and legal status to work in the US. Employers are required to keep this form for three years after hiring or one year after firing an employee, whichever comes later.

Form W-2, Wage and Tax Statements

Form W-2 is a mandatory document that records an employee’s total annual earnings, including payroll taxes and other deductions, for both internal and IRS reporting purposes. 

Form W-4, Employee’s Withholding Certificate

Form W-4 determines the amount of income tax withheld from an employee’s paycheck. Employers must update these records when employees submit changes to ensure accuracy and compliance. 

Pay stubs

Pay stubs are paycheck records detailing an employee’s earnings, tax deductions, and net pay for each pay period. According to the FLSA, employers should keep employees’ pay stubs for at least three years.

Payroll registers

Payroll registers are comprehensive records summarizing all employee payroll data for each pay cycle, including working hours, wages, deductions, and tax withholdings. Employers must keep these records for at least three years to comply with the FLSA. They must also take into account state-specific regulations, as they may impose stricter record retention requirements.

Payroll tax forms

Payroll tax forms include forms 941 (quarterly federal tax return) and 940 (annual unemployment tax return), which are necessary to meet IRS tax reporting requirements. Employers are required to keep employee tax forms for at least four years after the tax due date or when the tax is paid, whichever is later.

Salaried time accounting forms

Salaried time accounting forms report task completion and working hours of salaried employees. Employers should keep them for at least three years to be in line with the FLSA, which covers record retention requirements for most payroll documentation.

State and local jurisdiction tax withholding certificates

State and local jurisdiction tax withholding certificates are used for calculating state or location-mandated employee income tax. Employers should retain these certificates for at least four years to comply with IRS payroll tax recordkeeping guidelines. 

Time off and attendance records

Time off and attendance records summarize employee vacation time, absences and leaves and are used to calculate paid and unpaid time off to ensure payroll compliance. Employers should keep these documents for at least three years under federal law (FLSA) or longer if state or local laws require it.

Timesheets

Timesheets are records showing employees' hours worked during a specific pay period. Employers use these records to calculate employee hourly wages and overtime, and they must keep them for at least two to three years to meet federal recordkeeping requirements.

Deduction information

Deduction records document employee deductions, including benefits, retirement contributions and garnishments. Employers must keep these records for at least three years. 

However, for deductions related to employee benefits like health savings accounts or retirement plans, employers may need to keep these records longer. Under ERISA, employers must keep retirement plan records for at least six years.

Wage and hour records

Wage and hour records document wages, working hours, and overtime for compliance purposes. Under the FLSA, employers must keep records specifying these employment terms for at least two years. 

Bonus, profit-sharing, or award paperwork

Bonus, profit-sharing, and award records contain information about employee bonuses, profit-sharing distributions, and other awards to provide transparency and accurate reporting. Employers must keep these records for at least three years to comply with FLSA requirements and at least four years for tax purposes. 

Employee personal information

Employee records include the employee's full name, address, and Social Security number, which are necessary for identity verification before payroll processing. According to the Equal Employment Opportunity Commission (EEOC), employers must keep these records for one year following employee termination. 

Direct deposit information

Employees must provide their bank account information to enable safe, timely, and accurate transfer of their wages. Employers should retain this information for one year after employment termination, or longer if necessary for tax or regulatory purposes, typically three to four years. 

Streamline payroll record management with Rippling

While scaling a business can be complex, managing employee documentation, including payroll records should not be—which is why you need a reliable payroll and HRIS solution. 

Rippling Payroll is intuitive, easy to use, and has a 100% error-free guarantee on every pay run. It also offers 600+ integrations, automatic and accurate tax registration and filing, and a dedicated mobile app where your employees can view their W-2s and paystubs, submit expenses directly, and more. 

With Rippling, you can: 

• Pay employees and contractors in the same platform
• Manage time and attendance natively 
• Run unlimited off-cycle pay runs at no extra cost 
• Set up multiple pay schedules, pay rates, and pay types in just a few clicks 
• Add recurring reimbursements (like cell phone payments, gym memberships, etc.) that are automatically paid out every pay period, monthly, or at whatever interval you choose
• Automatically calculate prorated pay runs for new or promoted employees 
• Manage all currency conversions, including payroll adjustments 
• Automatically calculate overtime for every country 
• Make changes after submitting payroll

FAQ about payroll records

What happens if you lose payroll records?

Losing payroll records may result in noncompliance with federal and state laws, leading to penalties and fines. Employers may also face challenges and disputes over wages and benefits with current or former employees if they don’t have payroll records to confirm their claims. 

Are employers required to provide employees with copies of their records?

Employees typically have the right to access certain payroll records, such as pay stubs or wage details. Employers are required by state or federal laws to provide copies of employee payroll documentation upon request. 

Can payroll records be stored electronically?

Yes, employers can store payroll records electronically as long as the chosen solution is easy to navigate, secure, and meets applicable legal requirements. More and more businesses opt for cloud-based document storage as a straightforward and affordable solution. Still, employers must follow encryption and cyber security protocols to manage employee documents securely and effectively.  

How do you manage payroll records during mergers or acquisitions?

Companies should ensure secure transfers of payroll records to the new entity and establish protocols for protecting employee data throughout the transition. This process involves adhering to federal and state payroll recordkeeping regulations, keeping employees informed about any changes during the process, and ensuring payroll operations remain uninterrupted until the transfer is completed. 

How long should you keep pay stubs?

Employers should keep employees’ pay stubs for at least three years to comply with the FLSA, while employees should keep them for at least one year (or until they verify their W-2 form) for tax purposes and two to three years if they plan to apply for leases or loans.

How long does a termination stay on your record?

Under Equal Employment Opportunity Commission (EEOC) requirements, employers must retain employee personal and employment information, including termination, at least one year following termination of employment. 

Although termination is not part of public records or employment history, it can be revealed during a reference check if the former employer provides such information.

This blog is based on information available to Rippling as of December 13, 2024.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.