Failing to pay payroll taxes causes severe penalties from the IRS. In fact, the IRS tends to view this kind of tax evasion as more serious than that of income tax evasion. Usually businesses don’t pay employment taxes du e to financial hardship, but another reason a business may not be paying them is due to paying employees in cash. This isn’t illegal unless the purpose behind it is to avoid paying taxes. The practice of not reporting cash payments is usually associated with employees, but it applies to employers, too. Here’s what you need to know about cash payments so you don’t end up with fines or even a jail sentence.
Reconsider paying in cash
The first thing to consider is if it’s really necessary to pay your employees in cash. Doing so is risky and requires superior bookkeeping for defense in the event of an audit or employee claim for workers’ compensation or unemployment benefits. The safer route is to pay employees by direct deposit or check. Using a payroll service makes the job even easier.
Keep accurate records
If you still decide to pay in cash, make sure you keep accurate and thorough records of payments. Include how much you paid the employee and when. Stay current with your records, and be honest and detailed. The extra work can save you from heavy penalties if the IRS audits your business.
Pay employment taxes
Report cash wages, even those to independent contractors, and file employment taxes, which include federal and state income taxes, FICA, unemployment and workers’ compensation. Not doing so makes employees ineligible for the benefits of those programs, and that will land you in trouble with the IRS.
Be involved in accounting
Even if you are the most honest businessperson in the industry, you are liable for any tax evasion of a dishonest accountant or bookkeeper, whether you knew about it or not. Therefore, it’s wise to be involved and aware of the accounting that occurs in your company to ensure compliance with all tax laws. You don’t want to be stuck paying the consequences of someone else’s illegal activity.
Act immediately in a legal case
If you find yourself facing the IRS in a legal case, act promptly to prevent accrued liability and limited solutions. Call an attorney immediately to discuss your employment tax dispute so you can discover the best course of action for your business. Relying on the services of an experienced lawyer can help your business survive legal ramifications.