How Long Are Small Businesses Required To Keep Payroll Records?

 

The IRS guidelines for recordkeeping for businesses can be difficult to navigate because the agency requires different records be held for different amounts of time. Generally, when it comes to payroll and employment tax records, taxpayers need to hold on to everything for four years. There are some exceptions and some reasons for holding records longer, though, and it’s important to understand them as a small business owner. It’s also important for owners to understand the possible consequences of missing records.

 


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4 Years From Today, or 4 Years From When?

 

Most of the time, businesses are advised to keep employment tax records for at least four years from the final day of the fourth quarter of a given tax year. If a business falls behind in tax payments, though, it can change the situation. The actual IRS guideline calls for records to be kept four years past the date the taxes were due or the date they were paid, whichever comes later. For any business paying taxes late due to extensions and payment plans, the final payment date for the tax year marks the beginning of the four-year window, not the first date on which partial payment was made, because the former marks the completion of payment.

 

Which Employment Records Does the IRS Require Businesses Keep?

 

Holding on to all an employee’s records for years on end can be cost-intensive for some companies. Data management requires professionals on staff to organize and access information whether it is digital or stored in hard copy. For that reason, many employers like to streamline old records to just the minimum requirements. For payroll taxes, this means preserving a specific set of records:

 

  • Copies of all employee tax forms, including W-4s and any W-2s returned as undeliverable
  • All records pertaining to the payment of annuities, wages, and pensions
  • Tips reported and fair market value for in-kind wages paid
  • Identifying information for the employer and all employees, including Social Security numbers and the employer’s EIN
  • Dates and amounts of tax deposits for the year
  • Copies of tax returns
  • Records verifying employees’ dates of employment

 

Much of this information will not become dated unless an employee leaves the company, like the W-4s and records of employment dates. The financial records pertaining to payments and taxes can be stored in collected files for each year, too, making them easy to archive.

 


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How Should Companies Store Payroll Records?

 

The IRS does not specify the kind of physical storage medium tax records need to be kept in, nor does it prescribe specific methods of storage or organization. Instead, the IRS requires businesses keep those records according to best practices for recordkeeping that are widely accepted and regulated, including the use of ledgers, journals, and the electronic equivalents of these, i.e., financial management software. Business owners need to be aware that all restrictions and regulations that apply to hard copy records like a ledger also apply to the electronic versions.

 

Which records a company needs vary from business to business, but all companies that pay employment tax need a ledger for outgoing employment tax and wage payments, including pension contributions. Other necessary documents may include the following:

 

  • A business checkbook
  • Daily or monthly cash receipt summaries
  • Depreciation worksheets for assets
  • A disbursement journal

 

 

When the IRS requests copies of this information, companies are required to produce it in an accessible format. Before electronic recordkeeping was widespread, this generally meant photocopies. Today, exporting to a secure and universally readable file type like a PDF is also acceptable most of the time. In the event of the IRS requiring any records to be produced, the point of contact with the agency should be able to provide information about the expected format to the company being audited. The important part is having it in a format that can be readily made available if called for.

 

What Are the Consequences for Missing Tax Records?

 

Most of the time, missing tax records can result in payment penalties. In general, the records need to be used to create tax returns substantiating that the payments made throughout the year were the right size and all penalties for late payment were paid. Records going missing after payments are made can render filing an accurate return next to impossible. When this happens, it creates a crisis for the company in question. Filing the most accurate and best estimate for taxes owed can work in the short term, but an audit will quickly reveal the issue should one occur.

 

In the event of missing records during an audit, penalties may be assessed above and beyond any estimate of additional taxes owed. How drastic the penalties become depends a lot on the amount of information missing and whether the IRS can prove it was a willful failure to keep records. Intentional failures of recordkeeping are misdemeanors and can result in up to a year in prison. As with any other crime, a trial is required before imposing criminal sanctions; however, the IRS can assess penalty payments at its own discretion when recordkeeping errors are made.

 


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When Should Businesses Keep Records More Than 4 Years?

 

Payroll records can be purged after four years in most cases, but there are times when a business may want to keep them longer. The IRS regulations on recordkeeping actually require those who filed fraudulent tax returns to keep their records forever, and tax malfeasance can be prosecuted for years if uncovered. Creditors and other financial resources may require a longer window of recordkeeping than the IRS, and if that is the case, purging the files before that window expires can create legal difficulties for a business.

 

For these reasons, many companies choose to keep archived summaries of records with the bare data needed to reproduce reports and major documents like tax returns indefinitely. Archiving outdated information electronically has become more and more accessible as storage costs plummet, too, allowing for more efficient storage. This makes it easier for more companies to keep longer records of their finances. Even when it is not necessary for taxes, there are advantages when applying for loans or establishing a business’s financial health, so long-term recordkeeping is an investment worth making.