Understanding The Risks Paying Employees In Cash

While advances in technology have allowed companies to pay their employees with direct deposit or bank transfers, there are some industries that still continue to use cash, given its speed and convenience. However, when paying employees in cash, it is important to understand the risks and the importance of remaining in compliance with the law.

FICA Taxes Won’t be Withheld

FICA stands for Federal Insurance Contribution Act. When your employees are paid in cash, they won’t have their FICA based taxes withheld. This means they could be denied access to social security revenue which can be utilized for calculating their benefits. The FICA taxes consist of medical and social security taxes which must be rendered by employers and their employees.

Employees Could Lose Eligibility for Worker’s Compensation

If an employee is being compensated in cash, this probably means they are not showing up on payroll, which will make them ineligible to receive unemployment benefits. But aside from this, they could also be denied worker’s compensation, which is a big deal for those employed in construction or related fields where there is a higher chance of injury.

There is an Increased Chance of Theft

If an employer is paying their workers in cash, this means they probably have a lot of it lying around, and even if its locked up inside a safe, it can still be broken into, either by employees who are familiar with the locks and security system or thieves that find out there is a large amount of cash on the premises. Either way, if this occurs the consequences could be devastating, as the funds needed to pay employees won’t be available. While hackers and cybercriminals can certainly access company bank accounts, it is much more difficult and easier for banks and law enforcement to trace. Furthermore, an armed robbery is far more dangerous, since the lives of employees would be directly endangered.

You Could Have Problems with Taxes or Payroll

Some employers that pay in cash won’t withhold the income taxes which are determined by employee wages. Additionally, they might not adhere to payroll laws, failing to report their employee wages to the Internal Revenue Service. All these practices are inherently risky, more for the employer than the employee. If they are caught, their business could be fined heavily which could jeopardize their operations.

It is understandable why many businesses, especially smaller ones, don’t like dealing with the government. The feds have a tendency to make everything much more complex and harder than it has to be, and simply paying your employees in cash may seem like the right way to go.

As long as everything is being reported, it shouldn’t be a problem, otherwise you might be able to get away with it for a while if you’re a small business, but your growth will likely be limited, because to operate on a larger scale you’ll need to switch to electronic payment systems. Regarding this matter, it is best not to cut corners. If you must pay your employees in cash, be sure to provide the pay slip with tax, gross pay and other relevant information.