The phrase “payroll recordkeeping” may conjure images of paystubs and W-4s. But there are other aspects that often fly under the radar and lead to administrative slip-ups. Here are three examples.
1. Fringe benefit records
The tax code provides an explicit recordkeeping requirement for employers with enumerated fringe benefit plans, such as:
- Health insurance,
- Cafeteria plans,
- Educational assistance,
- Adoption assistance, and
- Dependent care assistance.
You’re required to keep whatever records are needed to determine whether the plan meets the requirements for excluding the benefit amounts from employees’ taxable income.
Tax code provisions regarding fringe benefit records don’t specify how long records pertaining to fringe benefits should be kept. Presumably, they’re subject to the four-year rule that’s widely applicable to payroll recordkeeping. Thus, you should retain them for at least four years after the due date of any federal income, Social Security and Medicare taxes for the return period to which the records relate or the date such tax is paid, whichever is later.
Caution: To the extent that any fringe benefit records must also comply with ERISA Title I, a longer retention period of six years applies.
2. Unemployment tax records
The Federal Unemployment Tax Act (FUTA) requires employers to retain records relating to compensation earned and unemployment contributions made. Such records must be retained for four years after the due date of the Form 940, “Employer’s Annual Federal Unemployment Tax Return,” or the date the required FUTA tax was paid, whichever is later.
In addition, be sure to retain records substantiating:
- 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,
- All information shown on Form 940 (with Schedule A and/or R as applicable), and
- If applicable, the reason why total compensation and the taxable amounts are different.
Remember, record retention requirements are also set by the federal Department of Labor and state wage-hour and unemployment insurance agencies.
3. IRS informational returns
The Affordable Care Act (ACA) requires certain employers to file informational returns with the IRS — namely, Forms 1094-B, 1095-B, 1094-C, and 1095-C.
The B Forms are filed by minimum essential coverage providers (some self-insuring employers) to report coverage information. Meanwhile, the C Forms are filed by applicable large employers to provide information that the IRS needs to administer employer shared responsibility under the ACA, as well as receipt of premium tax credits. (Forms 1095-B and 1095-C are also furnished to individuals.) Retain these forms for at least three years from the reporting due date.
Also retain information returns and employer statements to employees on tip allocations for at least three years after the due date of the return or statement to which they relate.
Paying employees is a complex task on its own; naturally, the recordkeeping involved can be challenging as well. Our firm can offer further assistance.