Employers can minimize their compliance and audit risks by meeting the recordkeeping requirements of the Internal Revenue Code (IRC). The IRC requires all employers that withhold and pay federal income, Social Security and Medicare taxes to maintain certain records for each employee. Failing to meet these recordkeeping requirements can mean big penalties, not to mention large settlement awards, should you be unable to provide the required information when requested by the IRS or in an employment-related lawsuit.
Income, Social Security and Medicare Taxes
These are the records that employers must keep 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 the payment was made:
- The Employer Identification Number (EIN).
- Employee name, address, occupation, and Social Security number.
- Total amount and date of each payment of compensation and any amount withheld for taxes or otherwise. This should include reported tips and the fair market value of non-cash payments.
- Amount of compensation subject to withholding for federal income, Social Security and Medicare taxes, and the amount withheld for each tax.
- Pay period covered by each payment of compensation.
- The reason(s) why the total compensation and the taxable amount for each tax are different, if that is the case.
- Employee’s Form W-4, Employee’s Withholding Allowance Certificate.
- Beginning and ending dates of the employee’s employment.
- Statements provided by the employee reporting tips received.
- Information regarding wage continuation payments made to the employee by an employer or third party under an accident or health plan, including the beginning and ending dates of the period of absence from work and the amount and weekly rate of each payment (including payments made by third parties), as well as copies of the employee’s Form W-4S Request for Federal Income Tax Withholding from Sick Pay.
- Fringe benefits provided to the employee and any required substantiation.
- Requests from an employee to use the cumulative method of wage withholding.
- Adjustments or settlements of taxes.
- Copies of returns filed (on paper or by magnetic media), including Forms 941, 943, W-3, 6559, Copy A of Form W-2, and any Forms W-2 sent to employees but returned as undeliverable.
- Amounts and dates of tax deposits.
Employers subject to the Federal Unemployment Tax Act (FUTA) must also keep records to substantiate the following for at least four years after the due date of Form 940 (or 940EZ) or the date the required FUTA tax was paid, whichever is later:
- 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 the employer and amounts withheld from employees’ wages (currently Alaska, New Jersey, and Pennsylvania require employee contributions.)
- All information shown on Form 940.
- The reason why total compensation and the taxable amounts are different, if that is the case.
Department of Labor, State Requirements
more There are also record retention requirements set by the Department of Labor (DOL) as well as wage-hour and unemployment insurance agencies on the state level. You can read the DOL’s rules at: www.dol.gov/topic/wates/wagesrecordkeeping.htm
If you need assistance in making your recordkeeping or payroll procedures, please feel free to call on us.
Treasury Circular 230 Disclosure
Unless expressly stated otherwise, any federal tax advice contained in this communication is not intended or written to be used, and cannot be used or relied upon, for the purpose of avoiding penalties under the Internal Revenue Code, or for promoting, marketing, or recommending any transaction or matter addressed herein.