Payroll Records: Everything You Need to Know
It is important to keep your payroll records correctly, and you need to know what documents to keep, where to keep them, and how long you should have them.8 min read
What Employers Should Know About Employee Payroll Records
It is important to keep your payroll records correctly, and you need to know what documents to keep, where to keep them, and how long you should have them.
Payroll Records and Procedures
Employee compensation represents one of largest and most important financial and legal obligations of a business of any size.
Business owners have state and federal regulations to follow and a moral obligation to distribute payroll checks on time.
Efficient payroll procedures are a must for organizing and keeping payroll records in order, not only to make processing payroll easier but to ensure that the payroll process remains in compliance with all legal requirements.
FLSA requirements don’t include payroll processing except to say that the information must be correct.
Whether the business processes payroll manually or uses computer software, reduce the chance for processing errors by following the same basic procedure for every payroll period.
Before payroll processing starts, review and make any necessary changes to an employee’s file, such as an address change, pay rate increase, or a change to tax deductions. You should also verify that the information entered on a timecard is correct.
Then, start by entering the correct payroll period, total hours worked, and deductions such as taxes, insurance, garnishments or charitable contributions.
If possible, run a report to check for any errors or review each payroll entry manually before issuing a payroll check.
By keeping accurate time and payroll records, you can be saved from FLSA lawsuits.Keeping track of employee hours worked can easily be managed by asking your employees to track their time on a paper time card.You can then enter them manually into the time management system.
Regarding FLSA lawsuits, being able to show precisely when your employees work and how much they are paid can critically help your defense.
Paper time cards are inaccurate and can be prone to human error, and they can be lost, unreadable, or padded. Because there’s no definitive way to prove that those time cards are correct (or not), they simply won’t hold up in court.
Manually entering timecard data into an accounting or time tracking system meansthere is a risk of hitting the wrong number on accident, reading the time cardswrong, and misinterpreting the total hours worked.
Manual or handwritten records, no matter how neat and organized, are not goodmethods and they won’t help anything to prevent an FLSA lawsuit.
To keep your company and you, and your employees, safe, you need to do accurate record keeping as a top priority now.
How can accurate records protect employers against FLSA lawsuits?
Maintaining accurate records, and taking the required steps to ensure that those records are accurate, may be the most important thing that employers can do to avoid FLSA lawsuits – or, at least, put themselves in the best possible position to defend against them.
In addition to misclassification claims, FLSA claims often are associated withclaims that employees were not paid for their time worked in total or they were not paid at the right rate for that work.
To resolve these kinds of claims, courts want to see an employer’s time and payroll records, among other things.
It is critical for an employer to be able to prove that their time and payroll records are accurate, and the reason for that is made clear if an employer can’t show that their time and payroll records are accurate – or if becomes clear that they aren’t accurate.
This issue is particularly problematic when it comes to allegations that employees performed work off-the-clock work before work hours, during breaks, or after their workday ends.
If employers do not have policies that require employees to report all time worked, or if managers do not take those policies seriously, then the accuracy of the employer’s time and payroll records comes into question.
States have additional or different recordkeeping rules, and employers should definitelyfamiliarize themselves with those rules and make sure they comply with them.
In all, accurate records are the main issue for company owners, sincehaving those records is absolutely necessary to defend claims of many kinds.
Without those accurate records, it is almost impossible for you to credibly defend yourself in a case of classification.
What are payroll records?
Payroll records are documents that have anything to do with an employee’s paycheck.
These kinds of recordsare related to employment taxes, benefits, hours worked, and all else associated with payroll.Therefore, employers have to keep track of detailed information and records to show that they have complied with the FLSA requirements for minimum wages, overtime, equal pay, child labor, and more.
Why do you need payroll records?
Keeping a payroll file for each employee helps you stay organized.When you run payroll or need to look up payroll information, all the documents you need are in one place, you don’t have to search through a bunch of files to get to your payroll records.
Each individualpayroll record contains sensitive, confidential information, and not everyone should have access to employee payroll records. It is important to maintain a payroll file that is separate from other employment information.
When you keep payroll documents apart from the rest of the employee file, you can limit who has access to the information.
Where should you keep payroll documents?
You should keep employee payroll records at your business or a central records office.
Put the records in a secure location; the records must be out of reach from people who are unauthorized to view them.
If you use online payroll software, you can use the system to hold most—if not all—of your employee payroll documents.
If you have printed payroll information, make sure the documents are locked up and safe from damage.
What goes in a payroll file?
You should keep many documents and information in an employee’s payroll file.
The payroll file should have the following information:
- Employee's full name
- Social Security number
- Complete address
- Birth date
- Offer letter (signed by the employer and employee).
It also needs to have any time-related information like time and day when workweek begins, time and attendance records, total hours worked each day, and total hours worked each week.
Pay-related information must also be indicated in the payroll file, such as: Rate of pay of the employee: Regular pay rate: Total daily straight-time earnings; Total overtime earnings for workweek; Additions to the wages (e.g., bonus pay); Expense reimbursement forms; Raise documentation; Payroll advance agreements; Payroll deductions (e.g., employee benefits) and associated paperwork; Form W-4; Income withholding orders; Pay records such as total pre-tax and post-tax wages paid each pay period; Date wages are paid and the pay period covered by the payment; Time off history and remaining time off; Direct deposit authorization; and Form W-2.
The file contains supplemental records such as Time cards, Wage rate tables, Work time schedules and Job evaluation.
The contents of the file will vary a bit between exempt vs. nonexempt employees; some included documents also depend on the benefits your business offers.
Executive, administrative, professional and outside sales employees are exempt from the overtime and minimum wage requirements of FLSA.
Pay records are kept to substantiate the claimed exemption, including the wage basis for the exempt employee (e.g., $500 per week), and total remuneration (sum of pay plus fringe benefits).
Employees paid Sub-Minimum Wage Rate
Qualifying learners, apprentices, and handicappedemployees, for example, may be employed at sub-minimum wage rates.
The employer must first obtain the proper authorization certificate from the Secretary of Labor; the certificate must be preserved in the employer's records for a specific period from the certificate's expiration date.
The employer must identify any employees paid at a sub-minimum wage rate, using a letter symbol on their pay records, and the employer must retain evidence substantiating the special characteristics of the employee that justify the sub-minimum wage rate.
The preceding requirements are in addition to the normal record-retention requirements applicable to employees covered by the FLSA.
Record keeping to substantiatespecial wage/hour practices
Employers who credit tips toward the minimum wage requirement must record the following items, in addition to the information normally applicable to a covered employee: weekly or monthly tip amount reported by the employee, amount of tip credit taken, hours of untipped work and hours of tipped work.
Another example is an employer that pays employees on a piece rate basis. In addition to the information normally required for a covered employee, the employer must record each piece rate applicable to the employee.
The employer must record the number of units completed at each applicable rate during the hours worked in excess of the statutory workweek, and the total weekly overtime excess compensation for the employee at the applicable rate.
Retention Guidelines for Payroll Records
According to the Fair Labor Standards Act (FLSA), you must keep payroll records for at least three years. The payroll records include records of wages paid, bonuses, and payments made to benefit accounts. Keep records that wage computations are based on for at least two years. Wage records include time cards, work and time schedules, and records of additions to or deductions from wages.Your state might also have laws on payroll record retention that require you to keep documents for a longer amount of time. Payroll records for 'white collar' exempt employee from FLSA are retained for a period ofthree years.
The required period of retention for employees paid under the minimum wage is three years.
Although the “where” and “how” of record storage -- whether on or off-site, hard copy, or electronic files -- is up to the business owner, payroll records must be available to district FLSA officials for inspection upon demand.
Privacy and security must be a top priority,and all payroll records must be kept separate from other business records and under lock and key.
As applied to employers that withhold and pay federal income, Social Security and Medicare taxes, the SSA/IRS Reporter says records relating to such taxes 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 the payment was made.
Employers should also follow the four-year retention rule for records relating to wage continuation payments made to employees by the employer or third party under an accident or health plan.
Such wage-related records should include the beginning and ending dates of the period of absence, and the amount and weekly rate of each payment (including payments made by third parties).
Employers also should keep copies of the employee’s Form W-4S, Request for Federal Income Tax Withholding from Sick Pay, and, where applicable, copies of Form 8922, Third-Party Sick Pay Recap.
Fair Labor Standards Act
Any business with annual sales of $500,000 or more, or that conducts business in more than one state, must comply with requirements of the federal Fair Labor Standards Act, commonly known as FLSA.
Although at first glance it may seem that very small businesses are exempt from FLSA requirements, Nolo points out that a business of any size that sends or receives letters to or from another state, or that uses the telephone to make or accept out-of-state business calls, or that takes out-of-state orders via a computer are included as employers that must comply with FLSA requirements.
Business owners should check with their state labor office for state payroll regulations that may apply; whenever there are both federal and state regulations, the stricter regulations will apply.
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