Wages to employees in cash!

[Jiggers]

Questioned a monthly bookkeeping client that her wages paid to her employees were very low, considering what she paid them last year.

She said that she was paying them in cash so that they didn't have to report it.

I asked why she was paying income tax and SE tax on that since she didn't get a deduction! Ding, that struck a note.

She has since brought me a detailed list showing the dates and amounts paid to each employee and wants to report this.

Do I add this amount, or do I gross up to cover at least the SS/Med that should have been withheld? Example: $100.00 cash wages paid. Do I show $100.00 or $108.28 less $8.28 SS/Med = $100.00?

[Brad Imsdahl]

She was willing to lie to the government about it once, why would you think she all of a sudden is going to be honest about it now?

I don’t like helping liars. I might have taken the opportunity to fire the client on the spot for suggesting cash wages paid to employees means they can get away with tax evasion.

If she really is just plain stupid and didn’t realize that what she did was against the law, then I might mess with her a little further and say she needs to get a signed note from each and every employee stating exactly what their understanding of gross reportable wages are. It would be unfair to the employee to gross up their wages beyond what they thought they were getting paid.

[jainen]

no problem, right?

>>It would be unfair to the employee<<

She didn't withhold Social Security--so she has to cover the taxes herself. That's the consequence of her choice. It was probably a good choice, allowing her to hire the best workers. It's just the cost of doing business, and the successful entrepreneur has to manage lots of little arrangements like that. Since she has detailed records, producing accurate W-2's is no problem, right?

[OldJack]

It would be unfair to the employee to gross up their wages beyond what they thought they were getting paid.

That is a ridiculous statement. The post states they are clearly employees and their gross should include the payroll taxes that are required to be withheld from gross pay. There is no law or rule that prevents or says employees can't be paid the net of payroll with cash.

[OldJack]

Truth is this type employer should have to also gross up 21% minimum withhold of federal income tax and pay over to the IRS on the 941.

[cpadan]

My advice it to go back to square one, get W-4's filled out by employee's. Then gross up to include proper withhodings so employee's don't take a big hit on 4/15. Good software makes the job easier.

[Jiggers]

Additional Info

The employer did issue some small paychecks to the employees and paid cash for some of the weekly work. The employer is going to pay the necessary payroll taxes.

[sea-tax]

Jiggers I do not think you have a problem Grossing up the Wages and withholding the proper FICA and MEdicare. Like someone else stated the client will have to pay both halves but maybe this will teach her a lesson. I would also tell her that the employees maybe a little less than pleased with her.

Also don't forget to tell her that there could be penalties for the 941 deposits that will be made late.

[Brad Imsdahl]

That is a ridiculous statement. The post states they are clearly employees and their gross should include the payroll taxes that are required to be withheld from gross pay. There is no law or rule that prevents or says employees can't be paid the net of payroll with cash.

Once again, OldJack, you jump to conclusions and attribute things I did not say to my “statements.” I never said there was a rule or a law that says you can’t pay someone cash and gross up their wage for payroll tax purposes.

Re-read my post. There IS a law against tax evasion. This employer was about to help her employees commit tax evasion. A felony, punishable by having to spend some time in prison. My comment was said in THAT context.

[New York Enrolled Agent]

Jiggers
To your original post - you will use the full amount. Look at Rev. Ruling 86-14. It gives a pretty clear explanation with examples.

[Davc]

There is no law or rule that prevents or says employees can't be paid the net of payroll with cash.

However there is a law in OR, and I'd bet in most states if not at the federal level, that requires employees to receive a pay stub for each payroll showing gross, net, and the various deductions.

[OldJack]

Once again, OldJack, you jump to conclusions and attribute things I did not say to my “statements.” I never said there was a rule or a law that says you can’t pay someone cash and gross up their wage for payroll tax purposes.

Re-read my post. There IS a law against tax evasion. This employer was about to help her employees commit tax evasion. A felony, punishable by having to spend some time in prison. My comment was said in THAT context.

As usual you evidently didn't bother to read the part of your statement that I quoted in my response. I did not say anything in your statement was ridiculous except the quote "It would be unfair to the employee to gross up their wages beyond what they thought they were getting paid." That is the statement that is ridiculous.

The rest of my comments had nothing to do with your statement. Re-read my post and quote.

[OldJack]

spitting law

However there is a law in OR

As far as I know there is no such law in my part of the country and yours is the first state I have ever heard having such law. We do however have a law against spitting on the sidewalk so it would not surprise me that we might have a pay stub law that no one knows about.

Are you sure that is not a union rule in OR rather than a law?

[taxmandan]

Orygun law

Yes, that's the state law, an employee must be provided a statement showing what was withheld from their wages and how much. I wouldv thought every state had such a law, else employers can withhold and not tell the employee what the withholding was for, until they issue a W2, not a good thing IMHO.

[Snaggletooth]

Whose Ox Gets Gored?

That is a ridiculous statement. The post states they are clearly employees and their gross should include the payroll taxes that are required to be withheld from gross pay. There is no law or rule that prevents or says employees can't be paid the net of payroll with cash.

Good grief Jack, why is it ridiculous to allow employees to be taxed on their agreed-upon amount of pay?? There IS a requirement on the employer to properly withhold or bear the liability themselves.

There is often an presumption that portrays such employers as evil and unscrupulous, while portraying employees with pristeen innocence and decimated victims. Fact is, many employees in such a situation are deliriously happy with the prospect of paying no taxes, and being able to draw disability and workers' comp while often working productively for a 40-hour week.

I would create corrected paperwork in the proper reporting periods to clean up the mess, and the woman would either pay me on the spot for this or I wouldn't do it. The agreed-upon wage would be their gross pay, and the employer would have to pay BOTH HALVES of the payroll tax as well as SUTA. Exactly what her true liability is. Then W-2s would be issued showing zero tax withheld, meaning the employees would have to deal with the liability for their own personal income tax. Some of them will become infuriated with their employer and quit - even those who were so enthralled with having no taxes deducted.

I would also have a "come-to-Jesus-meeting" with this employer, and explain what kind of tax practice I run. If she is not willing to deal forthrightly with this problem and with future tax issues, she would have to go somewhere else.