One topic covered in this chapter is: "methods of paying wages and salaries." Using the knowledge...

One topic covered in this chapter is: "methods of paying wages and salaries." Using the knowledge you gained in this chapter, examine the following real life situation and answer both questions (remembering the requirements above): You are a payroll accountant in a small accounting firm. One of your clients, a small business owner, has told you that he wants to pay some employees in cash instead of check, direct deposit, or pay cards. His reason for wanting to pay some employees in cash is that some of his employees do not have a checking account. While this practice is technically not illegal, what advice would you give the small business owner? What is your reason behind offering this advice?

Expert Solution

Paying in cash is absolutely legal, provided that the payroll is reported to the IRS and certain deductions that should be done such as below are done.

Income taxes that are state, federal and local.
FICA taxes
Health insurance and anything that has been mandatory to have been deducted.

However since paying in cash is absolutely Legal and may seems to be the easiest way for an employer to pay in cash but this also has some limitations in the future.

Lack of records.

If we are paying in cash than we need to make a record of what has been paid and we have to spend time to do the bookkeeping to record these cash payments.

Failure to deduct the statutory deductions.

This has been seen many times that employer who pay in cash often forget to deduct the statutory dues and than this becomes difficult for them to do that on a later date.

Cash payments are more prone to audit

Cash payments are generally seen with a bad eye as they are the potential source of frauds, such payments are always needs to be explained at the time of audit and may than consumes time at the later date.

So this is advisable that the cash payments should be restricted and should only be made in case there is no other choice.

ekkarill92 answered 1 year ago

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