If you make cash payments to independent contractors, the first thing you should know is that doing so is not inherently illegal. Cash is still an excellent method of payment, as well as being legal tender. Beside that point, due to certain legal restrictions, some industries are stuck using a cash-based system anyway; such is the case with the state-legalized cannabis industry.
If you have cash on hand and want to pay your contractors with it, you technically can do so.
If you are audited by the California Employment Development Department (EDD) or the Internal Revenue Service (IRS) you must prove that your cash payments to the contractors were within legal parameters.
You must have a reason for paying in cash rather than using checks or electronic transfers (which create a record of your transactions).
State and federal tax authorities almost always think you have some hidden agenda when you pay in cash. They think you are doing that so you can:
In either case, the penalties can be severe, so you should hire a skilled tax lawyer to help you avoid serious consequences if you are accused of one of those activities. You should proceed with caution if you are facing an audit or investigation for paying contractors in cash. Even if you did not intend to break the law, you may still be in jeopardy. This is one case where you want to be sure that your books are in order and double-checked.
One difference between independent contractors and employees is that employees have some of their wage withheld for Social Security and Medicare. Independent contracts instead have to pay self-employment taxes, as if they were a small corporation.
If you didn’t pay the state payroll taxes related to your cash payments and the contractors should have been categorized as employees, then you will have to deal with the EDD. The EDD aggressively enforces employers’ payroll tax obligations. In addition to paying all past-due payroll taxes, you would have to pay interest and a 15% fine.
Not paying California state income taxes also triggers interest and penalties. This includes a standard penalty of 5% of the total amount due. This can rise to up to 25% of the total amount due. It’s possible the State of California may deem your using cash to pay contractors as a way for your contractors to avoid paying state income tax.
Payroll or income tax evasion is a serious offense that can result in an IRS investigation. This is the worst-case scenario, and it is a real possibility for business owners accused of defrauding the federal government by using cash payments.
If you are looking for a consultation with an expert tax attorney click here to access our calendar, or call us at (888) 515-4289.
Understanding Base Erosion: The Challenge of Profit Shifting Base erosion refers to the phenomenon wherein multinational enterprises (MNEs) exploit cross-border… Read More
This article endeavors to provide an exhaustive exploration into the intricacies of foreign trusts, aiming to offer clarity for trustees,… Read More
Understanding the ins and outs of providing free meals and/or lodging to your employees can be a bit daunting, but… Read More
As state tax revenues taper off from their peak levels, there's a growing debate over the financial viability of the… Read More
Imagine a dynamic sales tax environment across the United States, where navigating sales tax regulations feels like solving a puzzle,… Read More
As we set sail into another year of navigating sales tax landscapes, there's a wave of anticipation for the exciting… Read More