So, I was in a situation where a car was damaged in a small collision. Just a small dent in the side door. It was the other side’s fault and they admitted as much. Their insurance agreed to pay for it.
I took the car to a mechanic for an estimate and he gave an written official estimate for about $1900. He did, however, tell me that if I were to pay in cash for the same work, it’d only cost me $1000.
That doesn’t seem to jive to me. If I had given him the car and tell him to work directly with insurance, he’d have $1900 in reimbursement. Yet he was willing to do the same work for $1000 if he didn’t have to deal with insurance company.
I could take the cash-out option (using his written estimate) and get $1900. I then could pay him directly $1000 for the repairs. Profit is $900, and I still get the car fixed.
So, what’s going on here? Tax evasion? Is car insurance reimbursement to mechanics subject to overhead and administrative fees that he was trying to avoid? Was it an attempt to entice me to use his shop with the $900 as the implicit kickback?
I have a theory depending on how bad the dent is, but it’s just a theory. There are dent specialists that will come by and get a dent out of a car without having to paint it, as long as the dent isn’t beyond their capability. Their fee might be $200 so he’d pocket $800 out of the $1000. If he billed insurance for subletting the work to a dent guy, they would probably limit him as to how much of a markup he could charge, so it might be better to charge the insurance company for a full $1900 repair/replacement of the door. But out of that money, the replacement door may be several hundred dollars, then someone (him or an employee?) gets paid for the hours spent replacing it, painting it, etc. He might not pocket as much in the end.
It would be simpler and faster to have a dent guy swing by and spend 30 minutes doing and get a profit of $800 for doing nothing than spend a week actually working on the door and pocketing $600.
If he bills the insurance company he has to claim the income. If you pay him cash, the thousand dollars is going in his pocket.
Whether or not you can get the $1900 out of the insurance company, I don’t know. They may want to see a receipt, not a quote and if my guess is correct, you’re not going to get one.
Having said that, if going through the insurance company means nothing out of your pocket, I’d go for it. Especially if it’s someone else’s fault. If your insurance company is going to cover it and your deductible is minimal, I’d probably still let them cover it, even if your rates go up, they’ll have to be up for a while to make up the difference.
However, if you’re going to be paying the bulk of this out of pocket, go for it, pay him in cash.
He wants it in cash so he doesn’t have to report, he’ll keep it off the books, you won’t get a receipt, if something happens to go wrong with the repair you’re out of luck, and if the insurance company finds out you pocketed $900 that was supposed to go toward the repair, they may decide to come after you.
I was an insurance adjuster for five years, so I have some first-hand experience on the questions posed by OP.
The insurance companies have some rights in these matters, as well they should, to protect against fraud such as suggested in this thread.
Those rights include inspection of the damage by an expert appraiser, by all means in the presence of the repairman of the owner’s choice. No insurance company is going to pay $1.90 on the dollar if it wants to stay in business, so they employ professional appraisers who have professional knowledge of what it takes to repair a car.
There isn’t a lot that can go wrong with a cosmetic repair to a car door. There is some sure - I suppose they could screw up some electronics buried in it but that would usually be something that is evident right away. I haven’t had a car insurance claim in a long time but, from what I remember, insurance companies sometimes (often?) pay you directly based on their own assessment of what it should cost to fix plus your own estimate(s) that you got from body shops. In the cases I am personally familiar with, you aren’t under any obligation to actually have the work done at all. You can just pocket the money and take a hit on the additional depreciation caused by the accident if it doesn’t affect the vehicle’s driving characteristics.
I don’t know if that is the case here but it may be something worth looking into. I have had friends that were good at working on cars take the check and then spend a weekend fixing it themselves to “good enough” condition so that they could keep the money. As far as I know, the insurance company didn’t care.
It might cost $1900 to do officially, but when you don’t pay taxes on the job, do the work yourself (or pay the employee under the table as well for this job) the shop’s costs go down. They may even be doing it at or below cost to siphon some money out of the business tax free.*
Also, and I’m not saying this is or isn’t the case. I’ve worked with people that will do the job for cash (under the table), but still guarantee their work. But this is in a B2B environment where they want to make sure they get more business. If they fix something and say ‘It’s 1500 by check or 1000 cash’ and you take the cash option and it breaks again in a week and he tells you that your SOL, you’re probably not going to use him again.
If I were taking the cash option with this guy I’d make sure that there was some kind of warranty, at least on the parts. Not much you can do for popping a dent, but if he’s installing a new panel, the part should still carry a warranty.
I wouldn’t be surprised if his answer was something like “no, this is an ‘as is’ repair, I’m doing it on my own time”.
*Before anyone says that’ll make them go out of business, yes, it would if they did it all the time, but not if it’s just once in a while. A thousand here and a thousand there isn’t going to drive a thriving business into the ground.
My theory is that it has nothing/little to do with income reporting. Most business accept “cash” and still report the income. Many use “cash” to refer to any payment in money directly from the customer in this circumstance, FWIW. In my limited experience paying bodyshops for a couple repairs, I inferred that the work done may be a little less professional for the cash rate. In the case of the insurance paying, (though YMMV with different insurers) I think the insurance is more of a stickler on certain specifications as far what parts are used, whether it’s replaced versus repaired, etc. Getting the full insurance payment may require spending more on parts and the painting process, etc.
Just some clarification. I took the car to the insurance’s authorized inspection center, and the estimates came out slight higher than this guy’s at $1950. It wasn’t a case of the guy inflating the cost to defraud insurance. He was willing to do it below the accepted market price. I just wanted to know what are some possible reasons on why he would be willing to do that.
Can you explain this in detail? How can a business siphon money out by doing a job at cost?
The insurance company estimates are often “spare no expense” in terms of parts quality and fixing absolutely everything as close as possible to perfect. There’s usually lots of wiggle room for doing things a little bit cheaper but still with acceptable results.
One of the big ones is parts supply. The insurance company will require new “insurance grade” parts which tend to be expensive. There’s often a supply of cheaper parts available that often aren’t particularly lower quality, or depending on what part it is might not really matter that much. Used parts are also usually frowned upon by the insurance companies, but can be way cheaper and are (obviously) OEM quality. There’s also simply the matter of maybe not fixing, or just “stabilizing” damage that’s purely cosmetic or not really noticeable.
I would definitely agree with getting an estimate for the lower cash price and asking what the actual difference in work he’d be doing is, if any.
I think the idea here is as a small business owner, you pay yourself out of the business and report that as your personal income. So if you can just pocket some money without it passing through the business you might be able to avoid paying taxes on it.
At cost is basically an arbitrary number, could be a few dollars above or below as well. You give the owner $1000 for the job, the business takes the loss on the parts and labor* for the job and the owner puts one thousand tax free dollars in his pocket.
It’s pretty common with small businesses.
*The owner could still pay some of the money back into the business and just take home part of it OR, if he’s really careful, he’ll pay for the parts and labor out of his pocket, essentially running a second cash business. This is sort of an advanced under the table trick. It keeps the main business’ profit margins in check so as not make auditors look closer.
In the case of a damaged door, the insurance Co may well require a factory made replacement door. For cash, you could well get a replacement door from a scrap yard.
Some insurance companies here have deals with paint manufacturers and insist that their expensive paint is used. The Insurer gets a kickback from the paint Co so if the cost is chargeable to a third party they are on a winner.
In the UK, in a no fault accident, the other party’s insurance pays the uninsured costs like the excess (copay) and hire cars etc.
No third party insurer requires a “factory made replacement door.” In fact, they’ll avoid using OEM parts unless you insist on them or third party/reconditioned parts aren’t substantially cheaper.