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Financial Management

Payroll Record Keeping

Introduction

"Payroll record keeping" is a term used to refer to the system an employer uses to calculate, track, and report employee pay. There are several resources available to provide information on payroll record keeping. A comprehensive list of these resources is available in the Additional Resources section below. Some of the most important highlights of these resources are:

  • be informed - know deadlines and legal requirements;
  • be accurate - check your work and make sure you have the most current information and forms;
  • be on time - fines and penalties for failure to pay and/or report on time accumulate quickly;
  • be diligent - stay on top of things.
Narrative

Doing payroll doesn't have to be difficult, but it does have some unique requirements that can cause problems if care isn't taken. Payroll also requires its own set of records aside from the normal financial record keeping requirements. This is so information required by the state and federal governments, the employee, and any other entity, such as an insurance or retirement plan organization or a granting agency can be tracked and reported.

A critical problem with doing payroll is failure to know and follow the rules and regulations for calculating and paying taxes. If these rules and regulations are not followed, the taxing entity (IRS or Department of Labor) is required to levy fines and penalties on the employer. As a result, the employer ends up owing much more money and could risk losing additional assets to satisfy the debt. By keeping accurate payroll records and paying the taxes owed on time, the employer can avoid stiff fines and penalties. Failure to comply can have serious consequences and even result in criminal prosecution.

It is important to keep in mind that the money that an employer withholds from an employee's pay for Social Security, Medicare, federal income tax withholding, and employment security (unemployment) tax does not belong to the employer. It is money that the employer holds in trust status for the employee until it is deposited with the appropriate agency.

Paying employees accurately and reporting taxes is one of the most important jobs of any employer. Considering that labor costs are a large portion of a municipality's budget, and that failure to properly pay federal and state taxes results in severe financial penalties, it is worth paying attention to the accuracy of payroll record keeping. Often the largest expense for a small community is employee salaries. Keeping accurate and up-to-date records also helps ensure that elected officials are able to make informed decisions about the future of the community.

State law AS 23.05.080 requires that employers keep certain employee records with specific information for a minimum of three years; however, there are other laws in effect that require certain records be kept for longer. A record of the employee's pay rate history must be kept for 50 years. The Alaska Records Retention Schedule provides timelines for how long payroll records should be kept by local governments.

Common payroll abbreviations and terms:

  • IRS - Internal Revenue Service
  • FICA - Federal Insurance Contribution Act
  • FUTA - Federal Unemployment Tax Act
  • ESC - Employment Security Contribution (State unemployment)
  • FLSA - Fair Labor Standards Act
  • OT - Overtime
  • UI - Unemployment Insurance
  • 941 - Federal quarterly tax report form
Frequently Asked Questions

Is there help available for ensuring payroll is being done correctly and in compliance with applicable laws?

Yes. The 'Additional Resources' section of this page lists state and federal offices that are set up specifically to provide information and assistance on payroll related questions. The IRS has separate providers available to offer assistance with payroll questions related to tribal entities and municipalities. The State's Department of Labor and Workforce Development (DOLWD) can provide information on State payroll requirements.

What information is needed in order to do payroll?

The following information must be available in order to pay employees:

  • know how the organization's pay periods are set up, i.e. weekly, bi-weekly, or semi-monthly. AS 23.05.140(a) requires employers to establish at least a monthly or semi-monthly pay period;
  • have a time sheet or record of time worked for each employee during the pay period that is signed by a supervisor or other authorized person;
  • know the employee's pay rate and whether that rate is paid by the hour or if it is a flat salary;
  • have a W-4 form providing information on each employee's tax status for their tax withholding rates (The W-4 also includes other required information such as social security number, address, etc.); and
  • know if there are any special circumstances such as, additional withholding requested by the employee, child-support payments that an employer may be required to withhold and send to a designated entity, tax liens, any direct deposit information, retirement plan information, leave policy, or any other special information affecting an employee's pay.

Where would the employee information needed to do payroll be kept?

The employer is required to maintain a personnel file on each employee with a record of earnings and other payroll information. Since information in the personnel file is considered confidential, these files should be kept in a locked file cabinet and access should be limited to certain authorized individuals.

NOTE: If there is a change to the employees withholding information or name change, it is the responsibility of the employee to revise their W-4 and/or contact the Social Security Administration with the name change information. Payroll personnel are not authorized to make changes unless the employee has done the necessary paperwork.

What government forms and publications are needed to do payroll?

A complete list and instructions are available in DCRA's Payroll Handbook for Small Communities. You should also contact your local IRS and the State's Department of Labor and Workforce Development offices to confirm what you need.

At a minimum, the following are required:

  • A federal form W-4 and a federal form I-9, filled out by the employee providing the employee's personal information and verifying the employee's eligibility to work in the U.S.;
  • A federal form 8109 or 8109-B which is used to make your federal tax deposits (employee withholding, social security, and medicare) to your federally approved financial institution;
  • A federal form 941 to make quarterly withholding and payment reports to the federal government;
  • A federal form W-2 to make annual withholding and payment reports to the employee and federal government;
  • A federal form W-3 to transmit the W-2s;
  • A State Department of Labor Employer's Quarterly report form; and
  • Federal publication 15 Circular E in order to calculate the employee's federal withholding tax, unless you have a payroll program that already contains this information.

How do you get federal and/or state forms?

The state and federal governments have regional offices in Alaska that have payroll forms and forms are available on the Internet. You can also request forms by phone from state and federal agencies.

What is an EIN and SEIN?

"EIN" stands for "Employer Identification Number". "SEIN" stands for "State Employer Identification Number".

Every employer must request and be assigned an employer identification number (EIN) from the Internal Revenue Service (IRS). When the IRS assigns the EIN, it will also provide federal payroll tax forms and tables needed to calculate and pay federal taxes. The IRS uses the EIN as a reference number to keep track of employee and employer taxes. An EIN only needs to be applied for once. If your organization has been an employer in the past, it probably already has an EIN.

The SEIN is the state employer identification number that the state DOLWD assigns to the employer. The employer requests this number from DOLWD, Employment Security Division (ESD).

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How do I pay the federal payroll taxes?

After determining the correct amount of federal tax owed, the federal income, Social Security, and Medicare taxes are paid with the same check using form 8109 or 8109-B. The payment must be submitted to a bank that is qualified to receive federal tax deposits. Check with the bank that your organization does business with to find out if it is approved to receive federal tax payments.

When does the employer pay the federal payroll taxes?

Depending on the employer's payroll tax deposit history for a given "look back period" the IRS determines whether it is a monthly or semi-weekly depositor. Our recommendation, however, is to deposit payroll taxes at the same time the payroll is done. This helps to streamline the process since all the steps are completed at one time, ensures that the deposits are made timely, and eliminates possible confusion about when and if payroll taxes were deposited.

What are some of the differences that determine whether a person is treated as an employee or contractor?

The IRS "Circular E, Employers Tax Guide" provides the IRS definition of an employee. The State Department of Labor, Employment Security Division also provides information and assistance in making this determination.

There are some general rules that will help correctly identify whether a person is an employee or a contractor. If the employer has control over the worker's job, pay, timeline, and duties performed, they are considered an employee.

A contractor, however, performs work that is not in the regular course of business for the employer and the employer does not have direct control over the contractor's daily activity. Contractors are generally hired to perform a certain task for the employer. Once that task has been performed there are no longer any ties between the contractor and the employer. Also, the contractor may work for several employers at the same time. When in doubt, check with the IRS and/or state DOLWD.

A worker can either be a contractor or an employee. If a worker is a contractor the employer is not normally responsible for withholding taxes and payments from their pay. If a worker is an employee, the employer is responsible for calculating withholdings; paying the federal government withheld income taxes, Social Security and Medicare payments (both employee and employer portion); and reporting employee taxes to the IRS.

How soon after employment terminates does an employee have to be paid?

Alaska Statute 23.05.140(b) outlines these requirements. If the employer terminates the employee the employer has three working days to pay the employee all wages, salaries, or other compensation. If the employee terminates employment, the employer may pay the employee all wages due at the next regular payday. If the employer received notification of the employee's termination less than three working days prior to the payday, the employer may pay the employee on the following payday without penalty.

What are the rules regarding overtime and where would I find information on exemptions?

Payment of overtime is addressed in AS 23.10.060 but AS 23.10.055(5) exempts employees of federal, state, or local governments from overtime compensation under Alaska's Wage and Hour Act, but not the federal Fair Labor Standards Act. There is a long list of exemptions in AS 23.10.055 that may affect a city or village. An employee eligible for overtime compensation must be paid one and one half times their regular pay rate for any time worked over eight hours per day and any time that is over 40 hours per week.

As an employer is the city responsible for reporting stipends paid to council members and others as meeting fees?

Yes. City governments are required to report stipends as wages. This means that a council member is treated like any employee and federal income tax, social security, and medicare taxes for council members or other government officials receiving stipends are withheld and the stipends are reported on a W-2.

How do I report the W-2 taxes if an employee died?

It depends on if you paid the employee wages and benefits in the same year of the death or the following year. See the publication below, Reporting W-2 Taxes for a Deceased Employee, for instructions.

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Additional Resources

Publications

Recommended web site search topics:

  • Internal Revenue Service
  • Alaska Department of Labor and Workforce Development
  • IRS Federal, State, and Local Government website
  • Social Security Administration Local Government Employers website
  • Alaska Department of Administration, Division of Retirement and Benefits
  • How to process payroll
  • QuickBooks payroll
  • W-2 form
  • W-4
  • I-9 form
  • Fair Labor Standards Act
Applicable Laws and Regulations

Federal

  • Fair Labor Standards Act (FLSA) 29 USC.
  • Federal Unemployment Tax Act (FUTA) 26 USC Chap 23.
  • Federal Tax Code 26 USC.
  • Federal Insurance Contribution Act (FICA) 26 USC Chap 21.
  • Medicare 26 USC Chap 24.
  • Davis-Bacon Act 40 USC Chap 3.
  • Immigration Reform And Control Act 8 USC.

Alaska Statutes

  • AS 23.05.080 Employer's record keeping responsibility.
  • AS 23.05.140 Pay periods and penalties.
  • AS 23.05.160 Written notice of pay rate, pay periods.
  • AS 23.05.170 Laid off/striking worker pay.
  • AS 23.05.180 Wages in dispute.
  • AS 23.05.190 Enforcement, investigation.
  • AS 23.05.200 Hearings on wage claims.
  • AS 23.05.210 Attorney general civil prosecution.
  • AS 23.05.220 Assignment of lien or wage claim.
  • AS 23.05.230 Prosecution of claims.
  • AS 23.05.270 Violations by employer.
  • AS 23.05.280 Penalties.
  • AS 23.10.040 Payment of wages in state.
  • AS 23.10.043 Deposit of wages.
  • AS 23.10.045 Payment of funds in trust, violation.
  • AS 23.10.047 Employee's lien against employer.
  • AS 23.10.055 Exemptions from Wage and Hour Act.
  • AS 23.10.060 Payment for overtime.
  • AS 23.10.065 Minimum wages.
  • AS 23.10.070 Exemptions from minimum wage.
  • AS 23.10.100 Employer's record, records retention.
  • AS 23.10.105 Workplace posting of Wage and Hour Act information.
  • AS 23.10.110 Employee's legal remedy.
  • AS 23.10.130 Statute of limitations.
  • AS 23.10.135 Violations.
  • AS 23.10.140 Penalty.
  • AS 23.10.145 Definitions.
  • AS 23.10.430 Employee access to personnel files.
  • AS 29.20.380 Duties of municipal clerk, records management, records retention schedule, procedure for inventory, storage, and destruction of records.
  • AS 29.20.500(4)(5) Duties of municipal manager, reports, custody of municipal property.
  • AS.40.21.020 Archival and records management program creation and administration.
  • AS 40.21.030 State archivist, review and approval of agency records retention schedules.
  • AS 40.21.070 Records management using program established for state records, state archival assistance.
  • AS 40.21.080 Disposal of public records, list of records being disposed, written authorization for disposal.
  • AS 40.21.090 Records transferred by political subdivision to state.
  • AS.40.21.110 Care of records, transfer of records to successor.

NOTE: There are many other laws relating to personnel management and allowable practices. The above laws pertain directly to payroll activities however.

Revised 1/21/2015