The Risk Of Paying Unreported Wages In Cash

The other day a contractor criticized me for not understanding the culture of his employees. He praised his crew as earnest workers who expect to be paid cash each week in exchange for their service. Whether the employees are compensated in cash or receive net wages funded to their bank accounts is irrelevant. Paying employees cash is not illegal. However, the act of paying unreported wages in cash is a crime with serious consequences.

An employer must withhold income taxes from employee wages based on the allowances the employee claims on their W-4. Some employers attempt to circumvent this responsibility by asserting their crews are all independent contractors and not entitled to wages. This is a topic for another time, but for now, the basic rule pertains to the employer’s direction and control of the workers, and whether or not the work is being executed by licensed sub-contractors. Paying cash doesn’t automatically make a crew independent contractors.

Paying unreported wages in cash not only evades income taxes it also avoids employment taxes such as FICA and re-employment. These are responsibilities directly affecting the employer. Since FICA is held in trust by the IRS, skirting funding payments can be considered an offense more serious than income tax evasion.

An employer being charged with not reporting wages must repay all the taxes owed and face legal consequences. Prison sentencing can range up to five years and fines can run up to $250,000 for an individual employer and $500,000 for a corporation. Charges for court ordered garnishment fraud can also be imposed if proven- for example- that the employer was attempting to assist an employee avoid child support.

Another scheme occurring among some employers- using payroll companies and employee leasing- is the reporting of partial wages and then paying the additional compensation to the employees in cash “under the table.” Since the leasing or payroll company receives the time and attendance reporting from the work site employer- assessing a payroll fee to administrate the compliance reporting of those wages, the worksite employer believes the fees are minimized by the partial amounts reported. This maneuver faces the same penalties as stated and is more prone to discovery.

Consider a worker suffering a total/permanent work-site injury making $35,000 in annual wages, but whose employer only reported minimum wages of $20,000. His permanent disability would be assessed on the $20,000, and if challenged would trigger an audit and expose the employer with tax evasion. This also applies to a worker laid off and applying for unemployment. The benefits would apply to the reported wages which may also prompt an audit.

Gulfcoast Employment Matters assists employers with compliance to state and federal regulations. GEM will provide suggestions assisting employers to make sensible decisions with profitability and growth. We welcome the opportunity to discuss your individual objectives to meet your individual goals.

John R. Miller

CEO

Gulfcoast Employment Matters

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