Payment in cash is easy and fast. Workers appreciate cash and it saves business owners money and hassle—in the short term. Paying cash under the table can also lead to prosecution for tax fraud.
How you structure your payroll is important, regardless of the size of your business. You may be a small business owner or the CEO of a large corporation with several revenue units. Large or small, payroll—and payroll tax—are regulated and require regular, accurate reporting.
There are a number of reasons that employers pay workers under the table, including:
- Workers may not have documentation that would allow them to work in the U.S.
- Paying employees in cash usually means that employment taxes are not taken out of the payroll, reported, and paid over to the Internal Revenue Service (IRS). Other times, workers have employment taxes taken out of their pay, but the money is not accounted for or rolled over to the IRS on behalf of the worker.
- The same goes for businesses that are required to provide Workers’ Compensation benefits for employees. Payments made to employees may be made in cash, with no report or paystub to show withholding on their behalf. Eventually, inability to obtain Workers’ Comp benefits after injury or workers who are unable to show withholding taxes on their tax returns can trigger an IRS tax audit.
- Employers or owners of struggling businesses may pay in cash to reduce short-term expenses or use withheld payroll tax revenue to pay their own personal expenses.
Regardless of whether you pay by cash or check, there are compelling reasons for collecting, accounting, and turning over appropriate payroll deductions to the IRS. While prosecution, fines, and loss of liberty can be abstract threats to a business owner trying to line their pockets or pay past-due bills, the Trust Fund Recovery Penalty (TFRP) is a focused, clear penalty awaiting those who fail their duty to pay over payroll taxes.
As we have discussed earlier, the TFRP is a tool used by the IRS to go after those responsible for collecting and paying over payroll taxes. The TFRP shreds the corporate veil and leaves the personal assets of a business owner vulnerable to seizure for past-due amounts owed on workers whose tax obligations were not lawfully paid over.
The scenes of a worker signing an “x” in the payroll book in return for weekly cash pay exists only in the movies. As a business owner or operation, understand your payroll responsibilities and your payroll tax obligations. Avoiding payroll taxes by paying in cash can be one of the most expensive decisions you ever make.
Cleveland tax attorneys help you at home and abroad
From offices in Westlake, Ohio or Chicago, Illinois, the legal team at Robert J. Fedor, Esq., LLC delivers aggressive legal representation if you are responding to a payroll tax issue or other tax controversy. Contact us today or call 800-579-0997.