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Payroll Tip – Be Prepared for Wage & Hour and IRS Audits

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This payroll tip discusses being prepared for Wage & Hour and IRS Audits – what records have to be kept, how long you need to keep them, etc.  From the General Ledger, a complete newsletter for Professional Bookkeepers published by the American Institute of Professional Bookkeepers.

how much data will Quickbooks hold?Break out the trusty old metal/wooden file cabinets and wipe off the dust — or maybe it’s time to invest in some virtual file cabinets where documents are scanned in and stored off-site but accessible if you need them.  Either way you are in for a shock!

We’ve mentioned previously that the U.S. Department of Labor is making a major push on wage-hour enforcements and that the IRS has also beefed up enforcement efforts – but what we didn’t include at that time was a list of documents that you must keep and how long they have to be kept.   When October’s issue of the General Ledger arrived, this information was front page news; and I felt I needed to share it with you.  I hope you are sitting down and have had your morning coffee!

Even if your company has never violated one IRS or DOL rule, substantial penalties may apply simply for not maintaining required records.  Now is the time to gather or seek copies of the records you are required to keep under federal law.  Records may be stored at at company offices; or for multiple locations, in a central office.

Keep for at least 4 years:

The IRS requires employers to keep the following for at least 4 years.  NOTE:  Because the 4-year period begins at different time, keep the following for at least 5 years.)

  • Employer identification number
  • Names, addresses (with Zip Codes), SSN’s, occupations of employees and recipients of payments
  • Amounts/dates of wage, annuity and pension payments
  • Pay-rate (hourly/regular rate of pay, shift differentials, piecework, etc.) for employer or third party payments
  • Employee tip statements and records
  • Copies of withholding forms (W-4, W-4P, W-4S, and W-4V)
  • Fair market value of in-kind wages paid
  • Returned employee undeliverable W-2 copies
  • Paid periods of absence due to sickness or injury
  • Each employee’s dates of employment
  • Dates and amounts of company tax deposits
  • Copies of company filed returns
  • Records of fringe benefits provided, including value and fair-market value calculations

The DOL or IRS (or both) require you to keep the following data.  If not in hard copy, it should be available to print.

Keep for at least 3 years:

  • Collective bargaining agreements
  • Employee’s sex and occupation
  • Time and day of week employee’s workweek begins
  • Hours worked each day and each workweek
  • Total daily or weekly straight-time/overtime earnings
  • All additions to/deductions from employee’s wages
  • Total wages paid each pay period
  • Date of payment and the pay period covered by it

Keep for at least 2 years:

Documents that support calculations for the following.

  • Work tickets
  • Piece work tickets
  • Wage rate tables, work and time schedules
  • Additions to or deductions from wages
  • Time cards

Keep for at least 4 year

From April 15 following the due date of the return; employment related tax forms and data.

  • Quarterly 941’s for annual 944/943 and amended returns (start the clock on April 15 of the calendar year after the quarter or year ends)
  • State and local payroll and employment tax returns
  • Copies of federal, state and local Forms W-2 and W-3
  • W-4’s
  • W-5’s (for tax years 2010 and earlier)
  • Special payments (e.g., sick pay, lump-sum severance)
  • Expense reimbursements and substantiation
  • Tax deposit receipts, cancelled checks, etc.
  • Supporting documentation for COBRA premium subsidy credits claimed on Forms 941/941-X
  • Supporting documentation for HIRE Act credits claimed on the 2010 Form 941/941-X
  • Exception for Form 940 – Retain for 4 years from the filing date in the event you need to respond to IRS inquiries about tax filings


Vendor and non-employee payments:

  • Name, address and TIN of each payee
  • Payment dates
  • W-9’s
  • Payer 1099-MISC and other information return copies
  • 945’s
  • Purpose of payments
  • Contracts for independent contractors
  • Notices related to backup withholding

All of this adds up to a LOT of paperwork that you have to keep on hand and accessible.  Storage is going to be an issue for most businesses as well as making sure that the stored documents are kept safe – I know that these issues are a concern for me, as like most business owners I only have limited space.

We’ve used QuickBooks since we started our business in 2000, so all of the “detail” is housed in our QuickBooks file; we did have to archive our file at the end of 2006 because it was getting too big and running slow, so we have a backup copy that  contains all the detail stored in our safe deposit box at the bank.  Our current QuickBooks file contains a summary of that archived information, and I keep that backed up and stored in a several locations – locally on an external hard drive, on a remote (cloud based) location that both my husband and I have access to, and a backup which I keep on my laptop – so my QuickBooks file is pretty safe.

But, the hard copy paper payroll related data – well, right now all of that is stored by year in 3-ring binders; and all of the paper copies of business income and receipts are stored in cardboard file boxes in our attic!  If there was a fire – well, we’d loose all that paper data!  I guess it’s time that I get my act together and do something about electronic storage for at least all of the payroll related data.

How are you storing all of the information that would be required for a wage-hour or IRS audit?

2 Responses to Payroll Tip – Be Prepared for Wage & Hour and IRS Audits

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    Nancy Smyth, Sunburst Software Solutions, Inc.
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