Employers must exert a certain amount of time and resources to properly retaining their income tax records. However, these are not the only documents you need to maintain. Retention of your organization’s payroll records also is important.
Rule of thumb
Most employers must withhold federal income, Social Security, and Medicare taxes from their employees’ paychecks. As such, you must keep records relating to these taxes for at least four years after the due date of an employee’s personal income tax return (generally, April 15) for the year in which the payment was made. This is often referred to as the “records-in-general rule.”
These records include your Employer Identification Number, as well as your employees’ names, addresses, occupations, and Social Security numbers. You also should keep for four years the total amounts and dates of payments of compensation and amounts withheld for taxes or otherwise, including reported tips and the fair market value of noncash payments.
It also is important to track and retain the compensation amounts subject to withholding for federal income, Social Security, and Medicare taxes, and the corresponding amounts withheld for each tax (and the date withheld if withholding occurred on a day different from the payment date). Where applicable, note the reason(s) why total compensation and taxable amount for each tax rate are different.
Other data & documents
A variety of other data and documents fall under the records-in-general rule. Examples include:
- The pay period covered by each payment of compensation
- The employee’s IRS Form W-4, “Employee’s Withholding Allowance Certificate”
- Each employee’s beginning & ending dates of employment
- Statements provided by employees reporting tips received
- Fringe benefits provided to employees & any required substantiation
- Adjustments or settlements of taxes
- Amounts & dates of tax deposits
Follow the rule, too, for records relating to wage continuation payments made to employees by the employer or third party under an accident or health plan. Such 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). Also keep copies of each employee’s IRS Form W-4S, “Request for Federal Income Tax Withholding From Sick Pay,” and, where applicable, copies of IRS Form 8922, “Third-Party Sick Pay Recap.”
Simple rule, complex info
As you can see, the records-in-general rule is simple, but the various forms and types of information involved are complex. Please contact our firm for assistance in managing the financial aspects of your role as an employer.