Have you ever been tempted to get paid under the table, or pay others cash under the table?
Or maybe you have some casual employees who would prefer to be paid out in cash because they just work on special occasions?
It’s probably not a surprise that paying employees cash is not the best idea, but if you are even considering it, here are some tips that can guide you in the best direction.
Own a small business? Check out 7 reasons you are breaking the law in your small business
Is it legal to pay employees in cash?
The Colorado Department of Labor and Employment clarifies that it is legal to pay employees in one of four ways:
- Direct deposit
So paying cash is technically okay, so long as you report it accurately.
But it’s important to bear in mind that paying cash without reporting income and taxes counts as paying “under the table,” and that’s illegal.
If you use cash on occasion to pay employees — say, to pay an occasional worker who is contracted — you must keep careful records of this and report all details, such as the date and the amount.
The Problems with Paying in Cash
When you pay employees cash — even if they are not paid under the table — all elements of accounting become more complicated.
Business owners who want to see people get paid under the table also face the potential issue that the employee doesn’t declare their income, in which case they could be a risk to you if the IRS traces their income.
Here are some other problems that can easily crop up:
- The IRS might be more likely to notice you and contact you for an audit
- Withdrawing an unusually large amount of cash (for instance, to pay one or more employees) can look suspicious
- If you aren’t using a formal payroll system for all employees, there is a greater chance of error
- Even if you make a genuine mistake declaring a cash payment, you may still face IRS penalties
- Employees could be penalized for not declaring the cash
- Employees could penalize you for paying in cash
The bottom line is that as a business owner, you should choose the easiest methods of paying employees in order to ensure that everything is reported accurately.
Hiring Employees and Obeying Employment Law
Business owners at all phases of business need to understand the consequences of ignoring or even not learning about employment law.
Having employees paid under the table can obviously be problematic, but when you look at the bigger picture, if you are not careful, you might miss other elements of employment law and end up paying for it later.
If you accidentally hire someone in a way that breaches ethical standards, for instance, you could be at risk of a lawsuit.
If wages are paid and not recorded, this means that employers aren’t getting insurance like worker’s compensation.
Failing to follow employment law or just business law in general puts you at risk of being penalized.
And remember that employees may also get penalized if they don’t report their income properly.
Keep Financial Records Organized
Employers need to be attentive to hiring practices and be transparent about what they are paying their workers.
This is just one thing on a long list of items that business owners need to keep on top of. Here are a few other points of employment law that they should know:
- Ensure that they have worker’s compensation
- Get an employer ID number
- Educate themselves on state and federal hiring laws
- Ensure that they classify workers according to proper procedure
- Develop a thorough employee handbook
- Keep accurate payroll records
- Give employees official pay stubs
If you have questions about employees getting paid under the table or anything related to that, don’t hesitate to reach out and contact us!
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