Ethics discussion: Payroll

An employer bears a special responsibility to account properly for the company’s payroll. A primary object of that responsibility is the government’s (federal, state, and local) “connection” to taxes levied on each employee’s income, as well as other taxes levied on the employer’s payroll.

Connor Lang was discussing summer employment with Jarrod McIntyre, president of Azalea Landscaping Service:
Jarrod: I'm glad that you're thinking about joining us for the summer. We could certainly use the help.Connor: Sounds good. I enjoy outdoor work, and I could use the money to help with next year's school expenses.Jarrod: I've got a plan that can help you out on that. As you know, I'll pay you $12 per hour, but in addition, I'd like to pay you with cash. Since you're only working for the summer, it really doesn't make sense for me to go to the trouble of formally putting you on our payroll system. In face, I do some jobs for my clients on a strictly cash basis, so it would be easy to just pay you that way.Connor: Well, that's a bit unusual, but I guess money is money.Jarrod: Yeah, not only that, it's tax-free!Connor: What do you mean?Jarrod: Didn't you know? Any money that you receive in cash is not reported to the IRS on a W-2 form; therefore, the IRS doesn't know about the income-hence, it's the same as tax-free earnings.
Why does Jarrod McIntyre want to conduct business transactions using cash (not check or credit card)?
How should Connor respond to Jarrod's suggestion?

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My Response: Jill Stidd 19 Sep 08 12:01 PM MST

Per out text and the IRS website, it states clearly that an employer is responsible for submitting FICA taxes, social security taxes, workers comp that have been calculated and withheld from the employee’s gross pay. The other segment of payroll taxes is state taxes which are explained here on the Employment Development Department (EDD) website, “California has four State payroll taxes which are administered by the Employment Development Department (EDD). They are Unemployment Insurance (UI) and Employment Training Tax (ETT), which are employer contributions, and State Disability Insurance (SDI) and Personal Income Tax (PIT), which are withheld from employees' wages.Wages are generally subject to all four payroll taxes. However, some types of employment are not subject to payroll taxes and/or PIT withholding. For more information, please refer to the California Employer's Guide (DE 44).” (http://wwwedd.cahwnet.gov/Payroll_Taxes/What_Are_State_Payroll_Taxes.htm)

The employer is required to meet the amount of FICA taxes that the employee pays. This can be a very large cost to the employer and must be budgeted into operating costs of the business. The penalties and interest are quite large for late FDT payments. This is all very expensive and time consuming for an employer and that is the reason that Jarrod is suggesting this arrangement. By using Cash for payment, there is no paper trail or accounting of the payment there for a way he thinks he can hide the payment to Conner. However what he is not telling Conner is that Conner will still be responsible for his portion of FICA coming out of his paycheck at the end of the year if this company should ever be audited by the Employment Development Department in the state of California and caught for these actions. Which could result in a much lower tax return for Conner than he expected. Connor could learn the very hard lesson that he should have said no to Jerrod.Here is some good advice from the IRS, “How Can I Avoid Receiving FTD Penalties? You will be subject to a FTD penalty. The penalty rate increases according to the number of days the tax liability remains unpaid.If you make a deposit; late (after the deposit due date), or; of an incorrect amount (less than 100% or theapplicable safe harbor amount), or; in an incorrect manner (to an unauthorizedfinancial institution, directly to the IRS, or notthrough an electronic funds transfer, if required.”

(http://www.irs.gov/pub/irs-pdf/p1932.pdf)Warren, Reeve, and Duchac.( 2007). Accounting 11. Thompson South – Western.http://wwwedd.cahwnet.gov/Payroll_Taxes/Reporting_Requirements.htm retrieved September 19,2008.http://wwwedd.cahwnet.gov/Payroll_Taxes/What_Are_State_Payroll_Taxes.htm retrieved September 19,2008.