The goal under this idea isn’t to hide the cash, it’s to make sure none of the checks sit in an employee’s car for 3 weeks until they try to deposit it, and then find out the bank account is closed.
Normal way:
Give employee paycheck
Employee wants cash
Employee signs check over to restaurant
Restaurant gives employee cash
Restaurant deposits check
Weird way:
Give employee paycheck and cash
Employee signs check over to restaurant
Employee gets cash whether they want it or not
Restaurant deposits check
There is no net difference as far as money-in money-out.
Avoided annoying case:
Give employee paycheck
Employee is lazy, plus in 1991 it took longer for checks to clear
Bank account moved to new owner
Employee attempts to deposit check
Eventually the check is returned generating anger all around
I don’t understand how this is cooking the books - walk me through it. I get an envelope with a payroll check for $153.72 and $153.72 in cash and I’m told to sign the check over to my employer and keep the cash. How does that show up differently on the books than my employer giving me the check and then cashing it out of the till at my request? (which was not unusual at any of the restaurants I worked at, nor was it unheard of at the stores where my friends worked).
It sounds shady but I’m having trouble figuring out what the scam is.
If they are receiving printed checks, then there is a record of the payroll transactions. So an auditor would be able to tell if they are paying the required payroll taxes, etc. Usually when you pay someone “under the table” you don’t want a record of them actually working there.
Paying the employees in cash would reduce the cash balance, which would be useful if they were trying to launder money. Except there would still be an excessive balance in the payroll account.
Based on this
Maybe it’s a simple as the restaurant wants to ensure the employees receive their paycheck in cash so they don’t have to incur bank fees or have an outstanding balance for payroll on the books for employees who take their time cashing their checks?
My guess too - the new owner will have a new bank account, the seller will want to close off their bank account for the business ASAP and wrap it up. So they would want to ensure there were as few uncashed cheques out there as possible. Perhaps kids living at home were not as likely to run out and cash a cheque the moment they received it. Perhaps too ther’s a bookkeeping reason for wanting to close off the books, the account, etc. of the old owner right away.
I assume nowadays most businesses use a payroll service, in order to ensure all the moneys are reported and appropriate deductions made, etc. Doing that work yourself for several dozen employees is no fun, when a payroll service can do so. Messing with that stuff is a quick way to get the IRS to freeze all your accounts and investigate.
So they wouldn’t have said “no payroll”, they simply cash the cheques immediately to ensure they clear the bank right away.
I’m not sure what the process is for a business cashing its own cheques from employee pay. I would have presumed they were deposited like regular cheques in the nightly deposit, a sort of “transfer money from A to A”, unless there’s a savings in not processing them - but then they have to be cancelled in the ledger/cheque register, which adds to the confusion in bookkeeping - actual wages have to be acounted for somehow (otherwise, it’s more “profit” and higher income tax for the owner on top of the tax fraud liability). My guess they went is as part of that night’s deposit.
The restaurant will show that the entire payroll was paid out leaving a balance on the bank account. But no money came out of the bank and there are no additional cash deposits so the balance left in the bank account is inflated. Restaurants are sketchy businesses with unreliable books. They’re trying to show steady weekly income that covers their expenses but often that’s not real, and the reason why the restaurant is for sale.
You have to assume that the money is coming from the owner’s pocket for that month’s payroll for that to make sense . And what’s happening with the paper checks - if they aren’t ever cashed or deposited, how does the fact that they were written show that the payroll was paid out? If I have $1000 in outstanding checks, any one buying the business should realize they have to deduct that $1000 from my apparent balance.
When you buy a restaurant the past disappears. There is no connection to the previous owner’s business. Those things don’t really matter. Individually owned restaurants are sold ‘as is’. You are better protected by the law in a private sale of a used car than you are with a restaurant. Anyone buying a restaurant starts a new set of books and should realize the old books can’t be trusted.
Why would they just not pay the employees in cash if they had any kind of concern about outstanding checks? It can get worse, the owner may have cashed those checks himself to take the cash out of the business. This is not rare when the owner has partners. Keeping the books for a restaurant is not that difficult. If an owner puts something in writing that doesn’t match the simple reality then they are hiding something from someone.
But - starting this the last month or so of the sales discussion is not going to hide the (un)profitability the previous years. Whether the profit is there, is hard to say if the hard cash for employees presumably came out of the cash deposit. Can you actually fake a higher “take” for the night by writing a cheque to X from the restaurant account, cashing it (or pretending to cash it), and putting the cashed cheque into the night’s deposit? The cheque is from the same account as the deposit goes into, so the total nominal deposit is higher by the cheque amount, minus any cash removed from the night’s eposit.
If you are using a payroll service to generate cheques, then that service creates the cheques and also submits the necessary tax information etc. All the owner would be doing is guaranteeing that there are a lot fewer annoying smaller cheques outstanding when it’s time to close the books. As I said, it’s a legal risk to not create and submit the necessary information.
(And if the payroll service generated the cheuques, then they are already part of the cheque register and need to be reconciled somehow. Putting them into the night deposit as “cashed” solves that problem.)
It seems like for the last month(s) the company was acting as the employees’ bank. I am not an accountant but I could see why the company might (or at least the owner thinks it has to) want to do this while selling the restaurant and continue to use the payroll services.
doreen
Let me see if I have this straight - you got an envelope with a paper paycheck , there was a difference between your net pay and gross pay , the envelope also contained your net pay in cash and you were told to sign the paycheck over to the restaurant?
The check stub had all the deductions listed…it looked exactly as it had for years. I’m 80% sure the cash equalled the net amount, not the gross.
Tim_T-Bonham.net
No, OP did wrong by participating in this fraud scheme.
Though they could probably plead ignorance, and avoid serious punishment…
If it comes up I’m going to appeal to, first, the statute of limitations–this was >30 years ago; second, I was 17 at the time and could not have really given less of AF, as long as I got paid. It was only much later on, after working in different places and seeing owners/managers do other more or less shady things that I got to wondering.
Saint_Cad
It seems like for the last month(s) the company was acting as the employees’ bank. I am not an accountant but I could see why the company might (or at least the owner thinks it has to) want to do this while selling the restaurant and continue to use the payroll services.
We were paid every other Friday and this occurred three, maybe four times. No more than a couple months.
All the books were done in house.
It would be, if it went on for more than one month. That is critical.
And iirc the Op stated all payroll deductions were taken out.
So, it is not money laundering.
Not payroll tax fraud.
This sounds right. They likely just wanted to make sure no checks were outstanding.
Right.
Exactly.
Now if this had been done for an extended period, some of the ideas posted here for nefarious reasons might be correct. BUT- it was for one month only, the last month the old owner would have the business. Those two facts make it clear it was just to reduce outstanding checks.
That could be if the restaurant deal hadnt already gone thru.
Because payroll tax reasons.
No, there was no fraud and the Op didnt do anything wrong.
You can. But if you have a payroll tax system in place, then you have to write the checks to make the numbers right.
The fact that their payroll service works from checks written, and then reports all that to the IRS. I have done this for business. This way they dont have to file any payroll tax stuff themselves their payroll accountant does it all. Its pretty standard in the business.
Ok. They certainly would do that, but there’s still no point to it. The owner never needs to disperse those checks. If they want to for some reason why would they assemble the cash and divide it up ahead of time, then hand out the checks only to make the employee endorse it over to them? They would ordinarily be cashing a lot of their paychecks out of the drawer already. This is all a lot of trouble for no good reason. There may be no good reason and no nefarious reason either, the owner may have been ill advised or paranoid about some failure to file a form, but it’s quite common to see financial shenanigans associated with restaurant sales.
The checks really only matter to the payroll service - in the 80s, my mother was the bookkeeper for a company that paid cash in little envelopes with all the deductions listed on the outside . She made all the necessary deductions, sent them wherever they were supposed to go and kept all the records. That worked fine because it was their normal procedure- using ADP or some other service and then suddenly switching to cash for a month would almost certainly be difficult.
Not sure how complex it was in the 70’s but in Canada today, you have to not only calculate assorted deductions - CPP, like SS, UIC (unemployment insurance), income tax withheld, etc., not to mention any benefits deductions, pension, taxable benefits, etc. - but you need to track this through the year, and at year end or termination of employment produce a form tallying all the totals. (Did the IRS require employers to track tips as income back then?) Interesting side question, did the employer give a termination slip for tax purposes, as if you’d quit his restaurant and hired on the new buyer’s restaurant? I’m guessing if the purpose was closing a bank acccount, probably yes. Plus, even though you got cash, all the numbers would add up when you did taxes at the end of the year, and that would match what the IRS computer said the employer sent in as deducted from you.
Tallying and tracking all this was a pain, especially manually, especially for a business like a restaurant with a lot of part-time workers, where you are doing a lot of calculations involving not that much money. It would make no sense to have to do a month of that manually if a service had been doing it previously.
Why not shred the cheques? If there’s an IRS audit, not having the cancelled cheques, not being able to prove the money was actually paid, it could look like a faked business expense. The eployer was just covering every base. The cheques are put in the nightly deposit, substituting for the cash removed from the deposit to make up the payments. They are processed the same as if they were cashed by the employees at their own banks. Everything balances, all the expenses are properly accounted for, all the necessary paper trails exist.
Similar requirements were in place at the time here in the US, but that’s just paperwork, and I’m quite sure that aside from taxes there was no pension or taxable benefits in this case of restaurant employees. Tips were not required to be counted as income until the 80s. Payroll services like ADP existed in the 70s but were not as commonly used as they are today, but it was a common job for accountants to manage a payroll for restaurants and other small businesses with more than a handful of employees.