As if payroll recordkeeping wasn’t already difficult enough, another layer of complexity has been added by the Affordable Care Act (ACA).
Now that the ACA rules are firmly in place, here’s a brief rundown of several areas of concern for record retention. This list is based on information provided by the IRS, the Social Security Administration (SSA) and the Department of Labor (DOL).
The IRS administers health insurance coverage requirements under the ACA. The law currently requires employers with 50 or more full-time employees or full-time equivalents to provide at least minimum essential coverage. For the IRS, employers must file these informational forms:
- 1094-B, Transmittal of Health Coverage Information Returns,
- 1099-B, Health Coverage,
- 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and
- 1095-C, Employer-Provided Health Insurance Offer and Coverage.
Employers should retain copies for at least three years or be able to reconstruct the data for that time period.
Federal Income Tax and FICA Requirements
Wages are subject to both federal withholding and Federal Insurance Contributions Act (FICA) taxes. The Social Security tax portion of FICA is equal to 6.2% of the first $118,500 of wages in 2016. The Medicare tax portion is equal to 1.45% on all wages.
Generally, employers must retain income tax and FICA tax records for at least four years from the date of the employee’s tax return due date. They must also keep information regarding wage continuation payments that the employer or a third party makes under an accident or health plan. This information should include the start and end dates of the time off from work and the amount and weekly rate of each payment.
Copies of documents filed on paper or electronically must be kept for at least four years after the tax return due date or, if later, the date the tax is paid. This includes the entire Forms 941 series and any W-2 forms sent but returned as undeliverable. It is permissible to destroy original W-2 forms if they can be electronically reproduced.
Employers filing claims for refunds, credits or abatements on income and FICA taxes, must hold on to related documents for at least four years. Companies with health insurance, cafeteria, educational assistance, adoption assistance or a dependent care assistance plan providing tax-free benefits must keep records establishing that the plans meet statutory requirements.
Finally, employers in businesses that require tip reporting must keep records substantiating any information returns or employer statements on tip allocations for at least three years after the return or statement is due.
Under the Federal Unemployment Tax Act (FUTA), employers must withhold amounts for unemployment payments. The FUTA rate is 6% on the first $7,000 of wages, but can be reduced by as much as 5.4% for credits on contributions to state unemployment programs.
Employers must retain records for four years from the later of either the date they file Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return or the date they pay the tax. The records should include:
- Compensation paid to employees during the year,
- Compensation subject to FUTA tax,
- State unemployment payments (separating out any employee contributions),
- All information on Form 940, and
- Any difference between total compensation and the taxable amount.
Note: Currently, only Alaska, New Jersey and Pennsylvania require employee contributions.
The Fair Labor Standards Act (FLSA) governs minimum wage and overtime pay rules. Employees must be paid at least the minimum wage and one and one-half times their regular rates of pay for overtime unless they are exempt.
Every covered employer must keep certain records for each non-exempt worker. Generally, these records should include the employee’s full name, Social Security number, address, birth date if younger than 19, gender and occupation, as well as:
- Time and day workweek begins,
- Hours worked each day,
- Hours worked each week,
- Basis on which wages are paid,
- Regular hourly pay rate,
- Total daily or weekly straight-time earnings,
- Total overtime earnings for the week,
- Additions to or deductions from wages,
- Total wages paid each pay period, and
- Date of payment and pay period covered
Records on which wage computations are based, such as time cards and piecework tickets, wage rate tables, work and time schedules and records of additions to or deductions from wages need to be kept for only two years. The remaining records should be held for at least three years.
Your adviser can help ensure that you follow all the rules for retaining payroll records.