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Jean   Murray

Don't Pay Employees with Cash to Avoid Payroll Taxes - A Bad Idea!

By July 7, 2011

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The story is familiar. A business owner gets into trouble with creditors and tries to save money by not paying payroll taxes. In this case, the owner of a lawn service here in town found herself in cash flow trouble, so she decided to stop paying payroll taxes (federal income tax withholding, Social Security and Medicare withholding). Bad idea. She got into trouble with the IRS, so to make matters worse, she decided to pay her employees in cash so "the government" couldn't take her money. She said her "accountant" told her it was OK to do this. (I want the name of that accountant, to avoid this person!)

I'm not a big fan of all-cash businesses. Receiving money in cash has its advantages, like helping you avoid high credit card fees, but cash businesses have disadvantages, especially when it comes to verifying income for insurance purposes. And what about paying employees in cash? It can get into a whole lot of trouble with federal and state taxing authorities, meaning fines, penalties, and maybe even jail time.

The IRS says,

Paying employees in whole or partially in cash is a common method of evading income and employment taxes. There is nothing wrong with compensating an employee in cash, but employment taxes are owed regardless of how the employees are paid. And the IRS will build its case using all available information even if there are no payroll records or checks.

Think about it this way: While getting paid in cash helps the employee avoid income taxes, it doesn't give that person credits toward Social Security and Medicare. It also doesn't pay unemployment taxes nor does it give the employee the protection of workers compensation in case of an on-the-job injury. So it really cheats the employee.

Some examples of this kind of tactic from IRS investigations in 2011 and 2010, both of which resulted in the business owners receiving jail time and hefty fines and penalties:

  • A Wisconsin family "failed to file quarterly payroll tax returns, filed false payroll tax returns, and paid employees in cash to avoid payroll taxes."
  • A Florida contractor "used ... cash to pay his workers, which allowed him to report lower wages and lower employment taxes due on [the company's] employment tax returns.
  • An Alaska drywall contractor hired undocumented aliens (another federal offense), paid them sub-market wages in cash and failed to withhold and pay employment taxes.

So, if you're thinking about paying your employees in cash, you might want to think again.

Read more about:

Employer Responsibilities for Payroll Taxes

Setting Up a Payroll System for Your Business

Confused about payroll taxes? Sign up for my free online "crash course" in payroll and payroll taxes - seven email lessons in seven days

February 8, 2013 at 4:04 pm
(1) Patricia says:

This is excellent, sage advice! And, steer clear of any employee who even asks if he/she can be paid in cash. They’re basically dishonest. I pay my taxes on my meager income, dammit, and so can everyone else.

February 8, 2013 at 4:05 pm
(2) patricia says:

Excellent, sage advice. Steer clear of any employee who even ASKS if he/she can be paid in cash. To me, that signals a dishonest, unethical employee. Besides….dammmit…I pay taxes on my meager income, and so can they.

February 12, 2013 at 2:58 pm
(3) Cash employee :( says:

Who can I contact that will do something about my boss paying cash to me and all their employees?

March 13, 2013 at 10:45 pm
(4) John says:

Just don’t work for the guy. Find another job. It was your choice to work for him and receive cash.

March 13, 2013 at 10:45 pm
(5) John says:

Just don’t work for the guy. Find another job. It was your choice to work for him and receive cash.

April 11, 2013 at 1:49 pm
(6) DNC says:

“Just donít work for the guy. Find another job. It was your choice to work for him and receive cash.”

May 5, 2013 at 8:51 pm
(7) sisty says:

How could i report employee paid in cash ?
thank you

May 7, 2013 at 8:40 am
(8) biztaxlaw says:

It’s not clear what you mean by “report.” If you mean reporting this for tax purposes, every employee, even those paid in cash, must receive information on gross pay and deductions and year-to-date. If you mean reporting to a taxing agency, it is not against the law to pay in cash, but your state’s taxing authority and the IRS might want to know if withholding was taken out of the payment.

August 12, 2013 at 12:01 pm
(9) Linda Geer says:

Paid part payroll and part cash. how can I get employer to pay taxes on cash earned?

April 21, 2014 at 10:13 pm
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