COVID-19 has changed everything. Many companies reduced the size of their workforces considerably in the early part of the year. Some of them went on to rehire later in the summer, while others made those reductions permanent. Businesses have also had to navigate furlough, applying for grants and loans like the Paycheck Protection Program, and navigating the payroll tax credit. 

Keeping accurate payroll records has always been important, but it’s even more critical now as businesses continue to navigate both the pandemic and a volatile economy. 

Income and withholding 

Employers must keep records relating to federal income, Social Security, and Medicare tax withholding for four years. This timeline is calculated by the due date on the employee’s personal income tax return, which is typically April 15th. This is called the records-in-general rule

These records should include your Employer Identification Number (EIN), your employees’ names, addresses, occupations, and Social Security numbers.

You should also keep the total amounts, dates of compensation, and amounts withheld for taxes or otherwise for the same amount of time. This includes reported tips and the fair market value of non-cash payments.

Additionally, you need to track and retain amounts subject to withholding for federal income, Social Security, and Medicare taxes, as well as the corresponding amounts withheld for each date. If the date of withholding differs from the date of payment, indicate that as well. Where applicable, note that the total compensation and taxable amount differ.

Other records

Other examples of data and documents that fall under the records-in-general rule include:

• The pay period covered by each payment of compensation
• Forms W-4, “Employee’s Withholding Allowance Certificate”
• Each employee’s beginning and ending dates of employment

For businesses that involve tipping, hold on to records in which employees report tips received. You should track fringe benefits carefully and keep any documentation that you require. You should also retain evidence of adjustments or settlements as well and amounts and dates of tax deposits. 

This rule applies to records that relate to wage continuation payments made by employers or a third party under accident or health insurance. Include the beginning and ending dates for the period of absences as well as the rate of payment by week. This includes payments made by employers and payments made by third parties. 

You should also keep copies of Form W-4S, “Request for Federal Income Tax Withholding From Sick Pay,” and, where applicable, copies of Form 8922, “Third-Party Sick Pay Recap.”

Key information

Payroll recordkeeping has become both more critical and more complex this year. For help reviewing your processes and identifying areas for improvement, contact your trusted Smolin advisor.