Quick answer

Employers should keep complete payroll and personnel files, tax returns and deposit records, proof of payments (EFTPS confirmations, cancelled checks), Forms W‑2/W‑3 and 1099s, I‑9s, employment contracts, benefits and retirement-plan documentation, and any supporting records that substantiate wages, exemptions, credits, or classifications.

Below is a practical, audit-focused breakdown with retention guidance, preparation steps, and examples from practice.

Why detailed records matter

In an employment tax audit the IRS seeks to verify (a) who performed work, (b) how much they were paid, (c) how much tax was withheld and deposited, and (d) whether payroll taxes were properly reported. Disorganized or missing records slow the process and often lead to penalties and proposed assessments. In my practice working with employers for 15+ years, the single biggest difference between a quick audit and a costly one is how organized the documentation is.

Sources: IRS — Employment Taxes; About Form 941; Understanding Employment Tax Audits (irs.gov).

Core records every employer must keep

The list below focuses on what IRS auditors typically request first. Keep originals when required (signed forms) and well-indexed copies of other items.

  • Payroll registers and paystubs: gross pay, deductions, net pay, pay periods, pay dates, and payroll taxes withheld for each employee.
  • Time and hours records: timesheets, timecards, electronic timekeeping logs, and records showing overtime calculations for non‑exempt employees.
  • Forms W‑2 and W‑3: copies issued to employees and transmittal records filed with the Social Security Administration.
  • Form 941 (Employer’s Quarterly Federal Tax Return): filed copies, schedules, and any supporting worksheets. Also keep Form 940 (FUTA) and state unemployment filings where applicable. (See IRS Form 941 information: https://www.irs.gov/forms-pubs/about-form-941)
  • Deposit records: EFTPS confirmations, bank statements, cancelled checks, deposit schedules showing federal tax deposits and the dates deposited.
  • Employee personal files: W‑4s (signed withholding certificates), Form I‑9s (identity/eligibility verification), copies of Social Security cards or SSN confirmations, addresses and contact information.
  • Independent contractor documentation: Form W‑9s, 1099‑NEC copies, contracts or engagement letters, invoices, and proof of payments.
  • Benefits and fringe benefits records: 401(k)/retirement deferral records, cafeteria plans, employer contributions, health insurance premium records, and required filings (e.g., 1095‑C for applicable large employers).
  • Payroll tax reconciliations: monthly/quarterly reconciliations between payroll registers, general ledger, Forms 941/940 and W‑2 totals.
  • Personnel/payroll policies, employment agreements, severance agreements, and any written compensation plans.
  • Records supporting special payments or credits: e.g., tip-credit substantiation, fringe benefit valuations, and documentation for any tax credits claimed.

Documents frequently requested early in an audit

The IRS auditor will often ask for a sampling of payroll records right away. Be ready to provide:

  • A current payroll register and paystub for the most recent pay period.
  • Copies of Forms W‑2 for the audit year(s) and Forms 1099 for payments to contractors.
  • EFTPS deposit receipts and the deposit schedule for the audit period.
  • Employment agreements or contractor contracts for any workers whose classification may be questioned.

Retention timelines and special rules

  • Federal employment-tax records: keep at least 4 years after the date the tax is due or paid, whichever is later (IRS guidance on employment-tax records). Retain supporting documents for that same period.
  • Forms I‑9: retain for either 3 years after the date of hire or 1 year after employment ends, whichever is later (U.S. Citizenship and Immigration Services).
  • If you claimed credits, refunds or filed amended returns (e.g., Form 941‑X), retain the supporting documentation until the statute of limitations for those items expires — often longer than 4 years.
  • State rules vary: check your state labor and tax agency requirements and retain state payroll records according to those rules.

When in doubt, keep records longer. For any items that could affect tax basis, ownership or large potential assessments, a 6‑ to 7‑year retention policy can reduce later headaches.

Sources: IRS Employment Taxes pages; Publication 15 (Employer’s Tax Guide); USCIS I‑9 guidance.

How to organize records for an audit (practical checklist)

  • Designate a single point of contact (payroll manager or outside accountant) to handle auditor requests.
  • Create an indexed digital folder and a physical binder for the audit year(s). Label sections by employee, by pay period, and by tax return (941, 940, W‑2).
  • Provide copies, not originals, unless the auditor explicitly requests originals. Keep originals in a secure place.
  • Reconcile payroll totals (gross, taxable wages, tax withheld and employer taxes) between payroll reports, the general ledger, and filed returns before providing documents.
  • Prepare brief written explanations for discrepancies (e.g., payroll adjustments, retroactive raises, corrected W‑2s) and attach supporting documents.
  • If you use a payroll vendor, request a consolidated “audit packet” from them: payroll register, deposit history, and employee earnings summaries.

In my experience, a one‑page reconciliation showing how payroll totals tie to Form 941/940 and W‑2 totals materially speeds the auditor’s review.

Common problem areas and how to avoid them

  • Worker classification (employee vs. independent contractor): maintain contracts, W‑9s, statements of work and proof of control. Misclassification is a frequent trigger for assessments and penalties.
  • Untimely or missed deposits: keep EFTPS receipts and bank reconciliations to show when deposits were actually made. Late deposits trigger penalties; documentation may reduce or remove penalties when reasonable cause exists.
  • Missing signed W‑4s or incorrect withholding: keep the latest signed W‑4 for every employee and an audit trail of any updates.
  • Cash payments and tips: document cash wages, tip reporting, and tip-credit calculations as thoroughly as for payroll checks.

See related guidance on preventing audits in our employer compliance overview: Employer Payroll Compliance: Avoiding Employment Tax Audits.

Working with third parties and vendors

If you use a payroll service, bookkeeping firm, or PEO, document the service agreement, who is contractually responsible for tax deposits and filings, and retain vendor reports. Even when a vendor prepares returns, the employer remains ultimately responsible for deposits and filings in the eyes of the IRS.

For response procedures and checklists, see: Payroll Tax Audits: Employer Response Checklist and How to Respond to a Payroll Tax Notice from the IRS.

What to do immediately after receiving an audit notice

  1. Read the notice carefully to confirm the tax years covered and the documents requested.
  2. Stop routine changes to payroll records that would alter historical information.
  3. Notify your payroll and accounting teams and engage a tax professional (CPA, EA or tax attorney) experienced with employment tax audits.
  4. Assemble the most commonly requested documents first (payroll register, W‑2s, EFTPS receipts, Forms 941/940).
  5. If you can’t produce a document, prepare a factual narrative explaining why and offer available alternatives (e.g., bank records, invoices).

Penalties, appeals and resolution options

Missing or inaccurate records can increase proposed liabilities and penalties. However, complete documentation can prevent penalties or reduce them by establishing reasonable cause. If an audit results in an adverse determination, you can appeal under IRS administrative appeals procedures or seek collection alternatives. Engage counsel early when potential civil or criminal exposure exists.

Practical examples from practice

  • Client A: maintained monthly reconciliations tying payroll registers to Forms 941 and W‑2 totals. The auditor completed the review in one day and proposed no adjustments.
  • Client B: used a payroll provider but lacked signed employee W‑4s and timecards. The audit took months and resulted in proposed payroll tax and penalty assessments that could have been reduced with better documentation.

Final checklist — documents to have ready

  • Payroll registers and paystubs (audit years)
  • EFTPS deposit confirmations and bank statements
  • Filed Forms 941 (quarterly) and 940 (annual)
  • W‑2s, W‑3, and 1099s (contractors) and W‑9s
  • Signed W‑4s and I‑9s
  • Time sheets and timekeeping reports
  • Employment and contractor agreements
  • Benefit and retirement plan contribution records
  • Payroll reconciliations and general ledger ties

Professional disclaimer

This article is educational and does not constitute legal or tax advice. Employers should consult a qualified tax professional (CPA, enrolled agent, or tax attorney) for guidance specific to their situation.

Authoritative resources

If you’d like, I can convert this checklist into a printable audit packet template or a fillable index for your files.