Here’s Why the IRS Requires Four Years of Payroll Records

The IRS requires employers to keep accurate payroll records for a minimum of four years. Those records have to be produced in the event an employer’s payroll practices are ever called into question. While the requirements may seem onerous, there are valid reasons for them. A North Carolina restaurant recently ordered to pay back wages provides a clear illustration of those reasons.

According to WRAL, a restaurant in the town of Apex found itself under investigation for failure to pay workers what they were owed. As a result of the Department of Labor’s (DOL) determination, the restaurant was required to pay more than $53,000 in back wages to 18 workers.

WRAL does not mention whether or not additional fines were assessed, but that is unimportant in the context of this piece. The DOL determined that the restaurant owners violated multiple provisions of federal law and, in so doing, shortchanged their employees.

Improper Time and Attendance

The restaurant was found engaging in illegal practices. The first practice was one of preventing tipped workers from officially clocking in until the first customers of the day entered the restaurant. Any time those workers spent at the restaurant with no customers to wait on was time they were not being paid.

This action resulted in untracked time and attendance that ultimately meant workers were not being paid for their full shifts. And because workers investigators didn’t have accurate records to look at, they could only estimate the amount of back wages due.

The second illegal practice this restaurant engaged in was paying its cooks a flat rate. While this could be comparable to paying a salary, which is not illegal, the restaurant’s flat rate scheme did not account for any overtime. This meant cooks often working in excess of 40 hours without being compensated for that extra time.

Management made matters worse by falsifying payroll records to make it appear as though cooks were being paid for their overtime. It’s clear from this particular practice that the restaurant was not acting in ignorance. Ownership knew exactly what it was doing.

Records Are Proof of Compliance

IRS regulations require accurate record keeping as proof of legal compliance. That was of no benefit to the affected employees in Apex, NC because their employer was not afraid to violate the law. But accurate records do benefit employees when their employers are honestly trying to follow the law.

BenefitMall, a Dallas benefits administration and payroll provider, says that accurate records prove compliance. Whether you are talking the restaurant business or any other industry, employers can always turn over their records if compliance is ever questioned. Furthermore, those records may be the only proof an employer has.

What Records to Keep

Employers should look to the Fair Labor Standards Act (FLSA) for details about record keeping. In a nutshell, the law requires employers to keep the following kinds of records on every employee:

  • Full name, social security number and address
  • Birth date for workers younger than 19
  • Sex and occupation
  • Time and day the workweek begins
  • Hours worked each day and week
  • Pay basis (e.g., hourly, weekly salary, piecework)
  • Regular hourly pay rate
  • Total daily or weekly earnings, including overtime pay
  • All wage additions and deductions
  • Total wages paid each pay period
  • Payment dates and the pay periods they cover.

As you can see, the requirements are quite extensive. But know that keeping accurate records protects your business. If you employ anyone other than yourself, do not skimp on your records. It could come back to bite you.

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