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Keeping Records Of Employees Is Not So Easy

© by Fred W. Daily

As long as it’s just you -- and maybe your spouse -- running the store, things are simple. But, most successful businesses will need help at some point, and with this help things become a little more complicated.

What makes adding a few employees complicated? Well, this is where the friendly tax agencies, meaning the IRS and probably your state as well, enter the picture.

Keeping track of your rent, utility and paper clip purchases is not enough, you must also keep records on all people -- employees and independent contractors -- who provided services to your business. Keep in mind that the IRS and state tax agencies can review these records as part of a regular audit or special employment tax audit. Normally, the audit worry period is three years from the time you filed your tax returns. To be on the safe side, six years is advisable for having these records handy. Basic employer records should show:

  • Employer Identification Number document issued by IRS. A sole proprietorship can use the owner’s Social Security Number. Otherwise, you need to get this EIN from the IRS. Call the IRS at the number below for more information, or ask your accountant.
  • Amounts and dates of wage payments to workers. Distinguish in your records whether they were employees or independent contractors.
  • Names, addresses, Social Security Numbers, Occupations, Dates of employment for everyone paid for their services. A lot of folks are reluctant to furnish this information after they have been paid--so get the data up front before they start the job.
  • Fringe benefits and goods or services provided in addition to cash to workers
  • Employee tips reported (if applicable to your business, usually bars and restaurants)
  • Copies of Forms W-2 and 1099 showing payments to workers, including any that were returned by the post office as undeliverable. These forms must be furnished to anyone who was a full or part-time employee, or was paid more than $600 in the preceding year as an independent contractor.
  • Income tax withholding certificates completed by each employee (Forms W-4). These should be filled out before each of these folks start work. After they are out of the picture, you will have a hard time getting their cooperation.
  • Federal and state payroll tax deposit forms with dates and proof of payment (deposit slip, canceled check, or financial institution receipt). If you don’t know how to do this, you better learn fast. Call the IRS (see below) and ask for an employer’s tax form package.
  • Federal Forms 940 (annual) and 941 (quarterly) and corresponding state payroll tax forms. When starting off with employees, you may want to hire a payroll tax service to handle this chore, or talk to an accountant.
  • Income tax returns of yours or the business entity on which payments to workers were claimed. Again, I counsel folks to keep these records for six years.
  • FICA (Social Security & Medicare) and FUTA (unemployment) taxes paid for each worker. This information and how to calculate these amounts are in the IRS employer tax form package.

For details on these and other employer record keeping requirements, see IRS Publication 15, Circular E. As with most IRS forms, it is available at IRS offices, by calling 1-800-829-3676 and on this site at: http://www.unclefed.com/IRS-Forms/2003/p15.pdf". And, see Tax Savvy for Small Business (Nolo Press) available at bookstores, and at Amazon.com.

By: Frederick W. Daily, Tax Attorney,
John Raymond, Bankruptcy Attorney, and
Allan H. Rosenthal, paralegal.
All of the three have offices in San Francisco.

© 1997

(This article was originally written for tax practitioners who represent clients before the IRS. But the information presented here is valuable for all taxpayers.)

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