Just in time for spring cleaning, the Social Security Administration and the IRS have issued a joint publication — the Spring 2015 issue of SSA/IRS Reporter — which offers valuable pointers for employers who want to clean up their old payroll records. In most (but not all) cases, that means following a four-year retention rule.

The Reporter cautions that failure to meet record retention requirements can result in sizable penalties and large settlement awards for employers that are unable to provide the required information when requested by the IRS or as part of an employment-related lawsuit. (Records could also be requested by state agencies.)

The Records-in-General Rule

As applied to employers that withhold and pay federal income, Social Security and Medicare taxes, the SSA/IRS Reporter says records relating to such taxes must be kept for at least four years after the due date of the employee’s personal income tax return (generally, April 15) for the year in which the payment was made.¹

According to the SSA/IRS Reporter, these records include:

• The Employer Identification Number;
• Employees’ names, addresses, occupations and Social Security numbers;
• 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 non-cash payments;
• 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 different day than the payment date);
• The pay period covered by each payment of compensation;
• Where applicable, the reason(s) why total compensation and taxable amount for each tax rate are different;
• The employee’s Form W-4, Employee’s Withholding Allowance Certificate;
• Each employee’s beginning and ending dates of employment;
• Statements provided by the employee reporting tips received;
• Fringe benefits provided to employees and any required substantiation;
• Adjustments or settlements of taxes; and
• Amounts and dates of tax deposits.

Employers should also follow the four-year retention rule 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). Employers also should keep copies of the employee’s Form W-4S, Request for Federal Income Tax Withholding From Sick Pay, and, where applicable, copies of Form 8922, Third-Party Sick Pay Recap.

A different rule applies for records substantiating any information returns and employer statements to employees regarding tip allocations. Under the tax code, these records must be kept for at least three years after the due date of the return or statement to which they relate.²

Claims for Refund of Withheld Tax

The SSA/IRS Reporter says employers that file a claim for refund, credit or abatement of withheld income and employment taxes must retain records related to the claim for at least four years after the filing date of the claim.

Fringe Benefit Records

The tax code provides an explicit recordkeeping requirement for employers with enumerated fringe benefit plans, such as health insurance, cafeteria, educational assistance, adoption assistance or dependent care assistance plan. They are required to keep whatever records are needed to determine whether the plan meets the requirements for excluding the benefit amounts from income.³

Note: Tax code provisions regarding fringe benefit records do not specify how long records pertaining to specified fringe benefits should be kept. Presumably, they are subject to the four-year rule under the records-in-general rule cited above, and thus should be kept at least four years after the due date of such tax 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, then a longer retention period of six years applies.⁴

Unemployment Tax Records

The Federal Unemployment Tax Act (FUTA) requires employers to retain records relating to compensation earned and unemployment contributions made. Under the records-in-general rule, 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.

Records should be retained 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 (currently, Alaska, New Jersey and Pennsylvania require employee contributions);
• 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.

The SSA/IRS Reporter reminds employers that record retention requirements are also set by the federal Department of Labor and state wage-hour and unemployment insurance agencies.

If you have additional questions, contact your payroll or tax adviser for guidance.

¹ Reg. Section 31.6001-1(e)

² Code Section 31.6053-1(l)

³ Code Section 6039D(b)

4 ERISA Section 107