Payroll Records Retention: What You Should Know for IRS Compliance
Published January 19, 2023.
Record keeping might not be the most exciting aspect of operating a business, running an office, or managing a department. However, keeping records is critical to ensure you keep track of your expenses for budget purposes, prepare for tax return season, and have an organized company.
While the specific business you're in can impact the type of records you have for federal tax purposes, it's vital to keep records as long as necessary to prove income, apply the correct payroll deductions, and confirm any inquiry from the IRS. And, yes, for IRS compliance, you need to maintain all records for employment taxes for a minimum of four years after filing the fourth quarter of the year (depending on the state your business is located in, it might even be five years).
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How to Ensure Compliance With the IRS?
While nobody wants to receive a visit from the IRS, it will make sure your company is compliant through routine compliance checks and potential examinations. Here's what these entail:
- Compliance check: The IRS will determine if taxpayers adhere to recordkeeping and information reporting requirements, which is different from requesting a review of tax returns and other related information.
- Examination: This would consist of a review of the company or individual's accounts and other financial information to ensure the information submitted to the IRS is in compliance with tax laws. The tax-collecting agency would also verify that the reported amount of tax is correct.
How to Avoid Being Flagged by the IRS?
Of course, what every employer and business wants to know is how exactly you can avoid being flagged by the IRS. First of all, it's vital to figure out why a company may be flagged—it could result from unreported earnings, excessive write-offs compared with income, incorrect paperwork and receipts, or refundable tax credits. The best way to refrain from being targeted by the IRS is to keep detailed records of everything and have any and all tax-related paperwork readily available to avoid delays.
» Want to reduce your payroll taxes? See 5 legitimate ways to do so
What Records Should Be Kept for the IRS?
Now, what types of records should be kept for the IRS anyway? Learning exactly what documents you need could save your business since an audit by the IRS could financially damage your company. So, here's what you should generally have within arm's reach:
- Employment Identification Number, or EIN
- The amounts and dates of all employee compensations, pension payments, and annuities
- Employee information such as names, addresses, Social Security Numbers (SSNs), and positions
- Dates of employment for every employer (past and present)
- How each employee is paid, including wage type (hourly or salary), pay frequency (weekly or bi-weekly), and payment method (direct deposit or paper checks)
- A list of dates and the amounts of tax deposits you made
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Ensure IRS Compliance Through Careful Record Keeping
Every office will decide how it wants to collect, manage, and store payroll records. While some choose locked cabinets, others decide to ditch manual payroll and adopt the online alternative, as this option can be more reliable and affordable.
Indeed, every business should consider using payroll software with the right features to store payroll records online, as their speed and accuracy can ensure better compliance with laws and regulations.
» Want to adopt payroll software? Read TBR's payroll software reviews and find the best one for your company's needs.