ARE YOU COMPLYING WITH THE FEDERAL PAYROLL RECORDKEEPING RULES?
As an employer, you have numerous recordkeeping responsibilities. Payroll is one area in which keeping proper records is especially important.
Under the federal tax law, employers that withhold and pay federal income, Social Security, and Medicare taxes must maintain certain records for each employee. Failure to keep proper records can result in substantial tax penalties in the event of an IRS audit. Maybe more importantly, failure to keep adequate payroll records can open the door to a large court or settlement award in an employment-related lawsuit.
What Records Must Be Kept?
Income and FICA Taxes. With respect to income and FICA taxes (i.e., Social Security and Medicare taxes), employers are required to retain the following:
· Employer Identification Number (EIN).
· The employee's name, address, occupation, and Social Security number.
· Total amount and date of each payment of compensation and any amount withheld for taxes or otherwise. These amounts include reported tips and the fair market value of any non-cash payments.
· Amount of compensation subject to withholding for federal income and FICA taxes and the amount withheld for each.
· Pay period covered by each payment of compensation.
· If applicable, the reasons why the total compensation paid and the taxable amount for each tax are different.
· The employee's IRS Form W-4 (the withholding allowance certificate).
· Beginning and ending dates of the employee's employment.
· Any statements provided by the employee reporting tips received.
· Any information regarding wage continuation payments made to an employee by the employer under an accident or health plan. This information includes: the beginning and ending dates of the absence from work; the amount and weekly rate of each payment (including payments made by third parties, such as insurers); and copies of any employee's IRS Form W-4S (request for tax withholding from sick pay).
· Fringe benefits provided to the employee and any required substantiation.
· Any requests from the employee to use the cumulative method of wage withholding.
· Adjustments or settlements of taxes.
· Copies of payroll tax returns filed (whether by paper or electronically).
These include Forms 941, 943, W-3, 6559, Copy A of Form W-2, and any Form W-2 sent to an employee and returned by the postal service as undeliverable.
· Amounts and dates of tax deposits.
These records must be kept 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 tax payments were made.
Unemployment Tax. Employers required to pay tax under the Federal Unemployment Tax Act (FUTA tax) must also keep records. These records include:
· 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 employee and employer and amounts withheld from employees' wages. (Currently, only a few states require employee contributions.)
· All information shown on Form 940.
· If applicable, the reason(s) why total compensation and the taxable amounts are different.
Employers must retain these records for at least four years after the due date of Form 940 (or 940-EZ) or the date the required FUTA tax was paid, whichever occurred later.
Other government entities also impose their own recordkeeping requirements on employers. The U.S. Department of Labor and state wage-and-hour and unemployment insurance agencies have specific recordkeeping rules employers must follow. The DOL's rules can be found at www.dol.gov .
We Can Help
Our firm is well versed in the payroll recordkeeping requirements for all businesses, large and small. Our professionals can work with you to review your current recordkeeping procedures and, if necessary, suggest ways to help ensure your payroll records are complete and accurate. Contact us today for more information on how we can assist your organization.