IRS/APA Review Employer Federal Recordkeeping Requirements

The Spring 2011 edition of the SSA/IRS Reporter includes an article by the American Payroll Association (APA) on employer federal recordkeeping requirements with respect to withholding and unemployment taxes.

Income, Social Security, and Medicare Taxes

Employers must keep the following records on each of their employees 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:

* Employer Identification Number (EIN);

* Employee name, address, occupation, and Social Security number;

* Total amount and date of each payment of compensation and any amount withheld for taxes or otherwise. This should include reported tips and the fair market value of non-cash payments;

* Amount of compensation subject to withholding for federal income, Social Security, and Medicare taxes, and the amount withheld for each tax;

* Pay period covered by each payment of compensation;

* The reason(s) why the total compensation and the taxable amount for each tax are different, if that is the case;

* A copy of the employee's Form W-4;

* Beginning and ending dates of employment;

* Statements provided by employees reporting tips received;

* Information regarding wage continuation payments made to the employee by an employer or third party under an accident or health plan, including the beginning and ending dates of the period of absence from work and the amount and weekly rate of each payment (including payments made by third parties), as well as copies of the employee's Form W-4S, Request for Federal Income Tax Withholding From Sick Pay;

* Fringe benefits provided to the employee and any required substantiation;

* Requests from an employee to use the cumulative method of wage withholding;

* Adjustments or settlements of taxes;

* Copies of returns filed, including Forms 941, 943, 944, 945, W-3, Copy A of Form W-2, and any Forms W-2 sent to employees but returned as undeliverable (if employers can electronically reproduce the undeliverable W-2s, they may shred the originals); and

* Amounts and dates of tax deposits.

Unemployment Tax

Employers subject to the Federal Unemployment Tax Act (FUTA) must keep the following records for at least four years after the due date of Form 940 or the date the required FUTA tax was paid, whichever is later: (1) the total amount of employee compensation paid during the calendar year; (2) the amount of compensation subject to FUTA tax; (3) the amount of 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); (4) all information shown on Form 940; and (5) the reason why total compensation and the taxable amounts are different, if that is the case.

Employers may be subject to large penalties for recordkeeping violations.