Who benefits more from being paid in cash? The employer or employee? Here are the pros, cons and legal implications of paying employees salary in cash. Indeed, it can get confusing handling a business’s finances. Payroll alone includes having to figure out things like tax reductions, keeping records, reporting employee’s income, etc and so on. However, to avoid all of that, an employer can choose to pay employees under the table.
For those unfamiliar with the term, paying an employee under the table means they get paid off the record. The employers give employees cash for their time instead of an official pay check. No taxes, no reporting, and no confusion. This is more commonly found in smaller businesses.
Certain types of businesses also do most of their selling with cash. Many of these “cash businesses” also pay their workers in cash. While it is not illegal to pay employees and independent contractors in cash, but it is not a good business practice for many reasons. Some businesses use cash to pay employees in an attempt to avoid paying payroll taxes, and some employees ask for cash payments to evade paying income taxes.
However, in the United States, employers must withhold payroll taxes (federal and state income tax and FICA (Social Security/Medicare) tax) from employee pay. The employers must also report the amount of withholding for each employee to the Internal Revenue Service (IRS).
Employers are expected to submit the total of both the employee — withheld from the pay check — FICA tax and the employer portion of the taxes to the IRS on a scheduled basis. Employers must report employee income on Form W – 2 each year. It includes cash income.
Other employment taxes must be paid on employee earnings, including unemployment taxes, and state workers compensation fund payments.
Employers must verify the work eligibility of newly hired employees, using Form I – 9 or the E – Verify system. This verification put the employee in the federal system, and if these employees are paid in cash, agency cross – checks can uncover attempts to avoid payroll taxes by paying in cash.
Table of Content
- Implications for Employers Who Pay in Cash
- 1. Safety Risk
- 2. Wage Statements
- 3. Proof of Payment
- 4. Easier to Make Payroll Mistakes
- 5. Potential for Penalties
- 6. Negative Consequences for Employees
- 7. Lack of Funding Options
- Implications for Employees Who Receive Cash Payments
- i. Income Tax Problems
- ii. Social Security Benefits
- iii. Other Disadvantages
Implications for Employers Who Pay in Cash
If your employer typically controls which tasks an employee performs each day and the way they complete them, then the employee should be paid on the books as an employee. This doesn’t mean they can’t get paid in cash, it merely requires the employer to withhold income, Social Security and Medicare taxes from each payment.
Every employer is also responsible for making matching contributions to Social Security and Medicare and paying federal unemployment taxes. By paying an employee under the table, the employer benefits by saving a substantial amount of money in these taxes and gets to avoid the bookkeeping burden that payment of these taxes would otherwise require. Therefore, if you want to use cash to pay employees, you can, but there are some considerations to keep in mind.
1. Safety Risk
Although it all depends on how many employees you have, you may find yourself making large withdrawals. It tends to be unsafe to carry large amounts of money for an extended period due to the risk of theft, or even just falling out of your pocket without noticing.
2. Wage Statements
Note that wage statements are required in many jurisdictions regardless of the method of payment. Although these can be provided if an employer pays in cash, but they are often forgotten. Penalties for not providing are generally per employee and per pay period which can lead to large penalties.
3. Proof of Payment
Payment on payday is also required in many jurisdictions. Checks help show payroll was provided on payday. Employers who pay cash may wish to get signed receipts from employees that they received the payment.
4. Easier to Make Payroll Mistakes
Choosing DIY payroll can be easy, but there can be some added complexity if you are using cash. Important payroll taxes can easily be miscalculated or not paid at all, and it is harder to fix mistakes when you are using paper money.
5. Potential for Penalties
Also have it in mind that ongoing payroll mistakes can be a red flag to enforcement agencies. Even if you make an honest mistake, you can face the consequences ranging from fines to audits to imprisonment in the most extreme cases.
6. Negative Consequences for Employees
While in the short term your employee may be excited to receive cash, over time it can negatively impact them due to the lack of an official paper trail.
7. Lack of Funding Options
Note that when you don’t have a formal payroll set up, it can be challenging to get loans and other funding when you find yourself in a pinch.
Implications for Employees Who Receive Cash Payments
Getting fair payment for work is a basic employment right. As such, not getting any form of payment for work is a violation of the United States labour laws and has legal consequences. Unfortunately, some employers avoid the legal issues of fair payments by not reporting their employees’ wages, paying them under the table.
While it may seem a relief to have cash in your hand after a day’s work, it often means employers are cheating employees as well as the government.
i. Income Tax Problems
Irrespective of how an employee earns income, they have an obligation to report all money they earn and pay the appropriate tax on it. If they don’t, they may run into trouble with the Internal Revenue Service if it catches wind of their income.
Some of the consequences they may have to face will include a penalty for failing to make estimated tax payments during the year (as a result of the employer’s failure to withhold), accuracy – related penalties if they don’t report all of those under – the – table payments on their tax return, as well as interest charges on the entire amount of back tax and penalties they owe. And if they don’t file a return at all, they even face failure – to – file penalties.
ii. Social Security Benefits
Agreeably, the employee may not feel it now, but they are actually putting their Social Security retirement benefits at risk when getting paid under the table. Since the employer isn’t paying into the employee Social Security and doesn’t withhold money from their wages for it either, it means they are not getting credit for working.
Ultimately, this can reduce the monthly check amount they receive during retirement. They can, however, avoid this result by filing a Schedule SE with their tax return and paying these self – employment taxes themselves.
iii. Other Disadvantages
No matter how much an employee strives to stay out of trouble, there are additional cons to getting paid under the table.
Since the employer incorrectly treats the employee as an independent contractor, they are ineligible to receive worker’s compensation if they ever injured on the job, they won’t be able to apply for unemployment benefits if the employment is terminated, and it is unlikely that they will ever receive some of the typical benefits of employment, such as 401(k) matching, subsidized health insurance or paid vacations.
In addition, they have no legal rights under federal and state employment laws, meaning they have no legal recourse if the employer illegally discriminates against them or refuses to pay them overtime for excess hours worked.
Who Benefits More from Being Paid in Cash? Employer or Employee?
From the factors analyzed above, an employer gains more from paying employees in cash. Many people think of their jobs as a way to earn income and support themselves, so receiving pay – no matter the form – may be the priority. While a cash payment may seem satisfactory, it may be a sign that an employee is not properly listed an employee at the job, which can have other consequences.
Note that some of the biggest concerns, as mentioned above, are the rights of the employee. The fact that they are not on the books at the place of employment may mean that they don’t receive the same consideration of labour laws while on the job. There can also be complications in receiving workers compensation or collecting unemployment.