Feb 14, 2024

Avoid Incomplete or Disorganized Records

Records management sets the foundation for your business's success and plays a key role in preventing other payroll processing mistakes from happening. Read through for some tips on complying with federal and state recordkeeping requirements.

Every employer covered by the Fair Labor Standards Act must keep records for each covered nonexempt worker. There's no required form, but the records must include accurate data about the employee and hours worked plus wages earned.

Once you've complied on a federal level, thoroughly research your state-specific requirements for each location you operate in. The scope and length of recordkeeping requirements may vary from federal obligations. Many states require pay stubs, either printed or electronic.

Here's a list of basic records you need to maintain:

• Employee's full name and Social Security number.
• Address, including ZIP code.
• Birth date if younger than 19.
• Sex and occupation.
• Time and day of the week when the employee's workweek begins.
• Hours worked each day and total hours worked each workweek.
• Basis for wages paid.
• Regular hourly pay rate.
• Total daily or weekly straight-time earnings.
• Total overtime earnings for the workweek.
• All additions to or deductions from the employee's wages.
• Total wages paid each pay period.
• Date of payment and the pay period covered by the payment.

Generally, you must report forms of compensation to the IRS. Employee pay includes more than salary, overtime and bonuses. The biggest issue is forgetting to detail smaller exchanges that are outside the standard or hourly payment, like not reporting sales incentive gifts. Even if it's just a $25 Starbucks gift card, the IRS wants to know about it, and not reporting it may result in penalties and tax liability.

How to be complete

Having incomplete or inaccurate records is a costly expense. Accurate recordkeeping is a must-have when it comes time to file taxes. How long should records be retained?

• At least three years for payroll records, collective bargaining agreements, and sales and purchase records.
• At least two years for wage computations, timecards, piece-work tickets, wage rate tables, work and time schedules, and records of additions to or deductions from wages.

There are additional rules for tracking tipped employees' hours and earnings. Payroll records must identify the employee as a tipped employee and keep a record of reported tips, tip credit applied and any changes in tip credit. Separate records should be kept for tipped and nontipped work.

Having an efficient record management solution in place can prevent many errors, such as payroll miscalculations and tax filing delays, from happening.

Accuracy is job #1

Every mistake made during the payroll process must be corrected to ensure that accurate records are kept. The IRS must know exactly how much money was allocated for each employee. Sometimes, it can take longer to resolve errors because you have to identify and fix them, and that can be challenging.

Records must be open for inspection by representatives of the Department of Labor, who may ask for extensions, computations or transcripts. Records need to be kept at the place of employment or in a central records office.

Many employees work on a fixed schedule that seldom varies, so your records should show whether employees followed the schedule. When a worker is on the job for a longer or shorter period than the schedule shows, record the number of hours actually worked as an exception.

Generally, you must report compensation to the IRS, and as you see, the DOL is also involved. In fact, your firm may be subject to an audit from either agency. Don't find yourself in hot water due to not keeping proper payroll records. Often in multistate or national firms, you may want to work with your counsel for guidance on what you need to store, for how long and where. 

Employers of all sizes should develop a records management program addressing who has access to records and what form they're kept in — paper and/or electronic. Of course, confidentiality of employee records and privacy of the information contained in them are key.

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