Sense with Cents

Payroll requires certain records to be kept for a designated number of years. Most would say five years as a safe rule of thumb — check listings or ledgers, time cards, tax returns, and so on. The question is not whether to keep records, but how.

Many people, myself included, are comfortable keeping PDF versions of payroll records. PDF satisfies the IRS rules for electronic record retention. But here is the thing: those rules are old. Last century, in fact. And buried in the fine print are provisions most would never agree to if they actually knew them.

Two in particular stand out. First, warrantless search — the IRS reserves the right to search any location where electronic records might be stored, and can require you at any time to prove you have the required records. Second, if a required record stored electronically might be unavailable, you are supposed to proactively report the potential issue to the IRS so they can investigate if they choose. Changed computers lately? Did you make sure last year’s records made the move? If not, technically you have a reporting obligation. Most people have no idea. As far as I have found, there is no such proactive reporting obligation if you simply cannot locate your paper records.

I’ll note I don’t revisit these rules often — I last checked more than a year ago, and at that point there had been no revisions since the 1990s. Worth verifying the current rules yourself, but the core provisions have been remarkably stable.

Beyond the legal fine print, there is a more practical issue: time. If you need to find a specific report from two years ago, it is easy to reach into a file cabinet and pull it out. It is not always easy to locate a PDF from a week ago, let alone two years back. File names change. Folders get reorganized. Hard drives get replaced. If any of this sounds familiar, you may also want to read about whether your backup is actually usable.

Paper is K.I.N.G.

There is also the matter of record destruction. The rules are clear — you are only required to retain certain records for a certain period of time. One important caveat: the clock does not start until a return is received by the tax agency. If the IRS says they have no record of receiving your Form 941 from two years ago, the retention clock on those records has not started yet. Once the required time has safely passed from the date of confirmed receipt, those records should be destroyed. Shredding a clearly labeled box of old payroll records is straightforward and satisfying. Hunting down and destroying PDFs from years ago is not terrible, but it is tedious and easy to do incompletely.

One additional benefit worth mentioning: when you use the efiling services offered through Medlin and NELCO, NELCO retains your submitted tax forms for the required period of time. The W-2s and other forms you file through Medlin and NELCO are essentially impossible to lose — you can reprint them at any time. It is one less thing to worry about at the end of the year, or two years later when someone asks for a copy.

Print your records. Label your storage. Shred on schedule. It is the simplest, most defensible approach — and it has worked for a very long time. And remember, there is no such thing as a payroll crisis — as long as you can find your records when you need them.