Search

Finding the Right Legal Representation for Your Company

Potential IRS Tax Problems: Getting Paid In Cash

8 September 2022

Tracy Roberts

Employers have various reasons for paying someone in cash. Perhaps they run a small business, such as a restaurant or laundromat, that is cash intensive. Maybe the employer finds paying workers in cash simpler than issuing paychecks. In some cases, however, the employer is paying in cash to avoid paying employment taxes to the Internal Revenue Service(IRS). Here is a closer look at this important financial topic.

Background

Although employers may have legitimate reasons for paying workers in cash, they often do so because they are part of the "underground economy." This term refers to economic activity that does not get reported to the IRS. The purpose of not reporting these transactions is to evade taxes. Not reporting economic transactions to avoid taxation is illegal and could potentially get both the employer and worker in trouble with the IRS.

Worker Vulnerability 

Employers are expected to pay Medicare and Social Security taxes to the government for each person they employ. If they pay in cash, a worker cannot be sure that these taxes are being. This leaves the employee in a vulnerable condition because they need to have a certain amount of taxes taken out of their pay and turned over to the IRS. If an employer does not fulfill this requirement, the worker might not be eligible for Social Security payments when they reach retirement age.

Independent Contractors

Another issue that could leave a worker being paid in cash vulnerable to tax problems involves the distinction between an employee and an independent contractor. If an employer classifies someone as an independent contractor rather than an employee, that individual is responsible for paying their own Medicare and Social Security taxes themselves. If the individual does not report their cash payments and pay the appropriate amount of tax to the IRS, they are subject to serious fines and penalties.

High Amounts

The IRS has stringent reporting requirements if someone pays you a large amount of money in cash at one time. If you are paid more than $10,000 in cash, cash in this instance includes money orders, bank drafts, traveler's checks, cashier's checks as well as currency and coins, you have 15 days to report the transaction to the IRS. 

Receiving cash payments is often done for illegitimate reasons, but even when it's done without any intent to break the law, it's still easy to run afoul of IRS regulations if employers and workers are not extremely careful. 

To learn more, contact an IRS tax problems attorney.

Share