I am in a quandary. I have a problem with the payroll setup at my new job. kinda complicated so I’ll do the best I can to explain.
The guy pays me partially by check. the rest is cash. Hypothetically I will explain it this way. He pays me $6.00 per hour for 40 hours with a check. Takes out all applicable taxes and deductions from that.
He then pays me in cash, $5.00 per hour for 40 hours. Any overtime I work I recieve $11.00 per hr. straight time, all in cash. No time and a half or extra compensation for overtime pay. No taxes are taken from this. I get a check and an envelope with cash in it and he makes me sign a reciept for the cash. He calls it contract labor.
My question is. Is this legal? (Pretty sure it isn’t). Since I have been accepting this arrangement for a few months. Can I get into trouble for that?
BTW I am in Texas so if any Texas HR or payroll people can advise me It would be appreciated.
I would ask if he plans on giving you a both a W2 and a 1099 at the end of the year. Either way, you are responsible for claiming it as income and paying the taxes on it if he is not.
The way he’s handling overtime sounds wrong to me, but I’m not an expert on such things.
If you never filled out a W-9 (which is the “contract labor” equivalent of a W-2), then he doesn’t have the proper records on file to give you a 1099 at the end of the year.
Also, if you make over a certain amount as “contract labor,” you will most likely be liable for taxes on that money (the cash). Your boss has a paper trail on that cash that you’ve been paid because you signed receipts.
If I were you, I’d CoverYourAss, and request a W-9. Just in case.
I didn’t catch your location (if any) before I started this reply, but in my state, there are state taxes that are also levied on contract laborers. There is a registration procedure by which contract laborers obtain state tax ID numbers.
This sounds like a dodgy situation, and not something you should willingly participate in. (But if it’s the only job available, well…) This is extra effort for him compared to just paying you with one check; the only reason to go thru this extra effort is if he is planning on cheating you, or the government, or both.
If he’s paying you straight time, not overtime for hours past 40 hours per week, he’s cheating you out of the overtime you are due. Maybe you agreed to this, but you’re still being cheated.
If you don’t report and pay taxes on all the $11/hour, you’re cheating on your taxes, and will get in trouble when you are caught. (And the IRS will note the part-paid-in-cash trick, call it deliberate and intentional tax evasion, and you’ll get tougher penalties because of it.)
He’s probably planning on not reporting the cash part of your pay (no other reason to do it in cash). That way he can cheat on certain payroll taxes. But this also affects you:
he’ll pay into Social Security on the $6 paid to you by check, but not on the $5 cash. So the amount recorded in your Social Security account is less, which can affect you at retirement time, 30 or 40 years from now.
he’ll pay into your state unemployment plan based on $6/hour, not $11/hour. If you ever get laid off, the unemployment check you get will be lower, based on only $6/hour.
same with Workers Comp; he’ll pay based on $6/hour; if you ever have to collect, your compensation will be based on $6/hour, not $11/hour.
if you have any company benefits, like life insurance, etc., these are usually set at 1-3 times annual income. But they’ll be based on the $6/hour reported income, not your actual $11/hour.
He’s planning on cheating, and asking for your assistance in it. I’d be looking for another job.
If I were you I would start looking for a job, NOW. He’s paying you ‘under the table.’ The receipt for the cash is two fold. One, he can prove he was paying you a total of $11.00/hr, and two if he get’s nailed for tax evasion he thinks he can pin it on you for not filing the appropriate taxes on your own…which he can, at least to a certain degree. If you like him, quit and find a new job. If you don’t like him, quit and find a new job and when you leave say “Please make sure when you send me my W2, you ALSO send my 1099-misc.” Most likely that’ll shake him up a little. Either way, what he’s doing is cheating the gov’t and trying to make sure YOU take the fall. If you really want to stay, request that all your money be paid by check and you want time and a half for overtime included in the check with all appropriate taxes taken out (ie 941’s + state taxes) OR tell him you want all your money paid in cash (you’d be considered a contractor, but in an arrangement like this, that’s supposed to be temporary) and the phone number of his accountant as you’ll need help filing the taxes at the end of the year after you get your 1099.
I’m not your lawyer, and this isn’t my area of law, but as I understand it, there is no real way that you can be an employee for a certain number of hours of work per week and then an independent contractor doing the same work or hours after that number. (I suppose a person could be both an employee and independent contractor simultaneously if, for instance, during the work day he was a salesman and after hours he came in to do work as a plumber with his own plumbing company, but I don’t think this is what you are talking about.)
From a federal tax perspective, even if he reports your taxes on both a W-2 for the wages by check and a 1099 for the cash as a “contractor”, you will be at a financial disadvantage. Normally, the employer is required to pay about 7.5% of your wages (above what the employer pays you) as social security tax while withholding another about 7.5% from your wages. If you have self-employment (independent contractor) income, you are required to pay “self-employment tax” equivalent to approximately the social security taxes both you and your employer pay, or about 15% of your self-employment income. In other words, if the taxes are all reported and paid correctly, you are losing about 7.5% on the cash wages.
So, from a tax perspective, among all of the other reasons, it is highly problematic.
Yes, he is cheating on his (employment) taxes, and is assuming you want to also cheat on your taxes.
Don’t worry, neither of you will go to jail for this rather petty tax fraud. If the IRS found out, you could both owe some rather hefty back taxes and penalties. To be totally honest, the IRS is so understaffed now your chance of being audited is about zilch (your employer isn’t stupid, he’s paying you a legit w-2 wage so it will look OK at a casual glance). What is more likely is that some ex-employee or ex-spouse (“All my Exes are in Texas…”)with a greiveance will snitch.
If this is a short time proposition, you might “get away with it”. It also has some small chance of being “legit” if it was for a short time contract- the IRS is pretty leinent on “contractor vs Employee” things that don’t go on for very long.
I’ve done this, as an employee, and it is quite common in my business.
There are advantages and disavantages.
+He is saying a lot of money my not matching (true) payroll deductions.
+You are saving taxes by understating your income.
-It is against the law, for both of you. (In a number of ways.)
-Your Social Security retirement income will be reduced.
Now in my case both my employer and I knew the ramifications. In fact the negotiations for pay were as much on how much was under or over the table as just how much.
A difference from your case is that I expected overtime. The tricky negotiation was that only the above the table pay was in overtime. The pay was so much an hour above the table and so much per week under the table.
Your choices are:
Work for someone who only pays above the table. This could be your current employer but I reckon the pay would be less.
Demand overtime pay.
2a. Demand overtime for only the above the board pay.
2b. Demand overtime for all pay.
This guy is a kinda shady character and looks to save a buck any way he can. I really feel uncomfortable with this arrangement and have saved ALL my check stubbs AND cash reciepts. Just in case of an audit or something. I assure you I am prepared to pay any taxes I owe and will.
I neglected to mention in my earlier OP that I am considering leaving the company and since I am an older guy, jobs are kinda scarce. If I need to try to draw unemployment can I use this as the reason I left the job?
If I did use it as my reason would it have ramifications on him? Actually I wouldn’t mind him getting his fingers burned a bit and maybe collect some of that time and a half I have not recieved.
Forgot to mention (MAN I need to use preview). I am the only guy at the place besides him that speaks english. I can imagine the games he is playing with those guys pay.
In terms of collecting unemployment, you are better off if he terminates your employment than if you resign. This might well be viewed as constructive discharge (he made you quit, therefore it counts as an involuntary termination, not a resignation) but that is never a sure thing. IIRC, Texas is generally an employer-friendly state for unemployment.
So if you go to him and say “Pay me the right way” and he terms you, that is pretty clear cut. But if he has a resignation letter from you, he would be likely to contest your unemployment claim to save himself a few bucks.
You would also have the option to burn his bacon and go to the Wage & Hour folks, whatever they are called in Texas. That will no doubt get ugly, but can potentially result in you getting double or triple the back overtime pay you are owed.
Also, you will need to go the route of reporting him if you want unemployment to consider you as having made $11/hr., not $6.
I am an HR person, not a lawyer, and as an HR person I wouldn’t want to touch that payroll situation with a 10-foot pole.
1-866-4USWAGE is the phone number for the Wage & Hour Division of the United States Department of Labor, the office which is charged with policing violations of federal payroll laws. They’re going to be in a better position than anyone here to tell you if this is legit or not, and it is possible that you can ask them your questions without revealing the name of your employer, if you don’t want to drop a dime on him. You might also counsult an attorney licensed in your jurisdiction; it is possible that the employer could owe you back wages on unpaid overtime. As has been said upthread, as a general rule, when someone gets paid under the table it is usually part of a scheme to defraud the employee, the government, or both.
You need to worry about insurance and liability, when you become an independant contractor. You work insurance won’t cover you if you get hurt during your extra hours. You will be liable if a person gets wronged or hurt because of you during the hours that are under a independant contractor.
The scenario is confusing too in that he is being paid by both sources for the same hours worked. So there’s no way to delineate which are the regular and which are the contractor hours. All hours are both, except for OT.
If it’s a job where he punches a time clock, that would prove that he was on regular hours.
Now that I think about I think (at least in Wisconsin) that you are eligible to receive UI if you’re employer asks you to do something illegal (like defrauding the gov’t). If that’s the case in Texas (check with your UI office/an attorney etc etc),it might just be a matter of asking for all your pay above the table, if he refuses then you could quit and get UI. Maybe, I’m no expert.
A couple decades back I worked for alarge retal company. They absolutely forbade the stores from any overtime. The store manager tried to do a independant contractor set up with me for some outdoor repairs. The person doing payroll told the manager that you can not hire an employee as a independant contractor for something outside their normal job. I was doing this with my brother who didn’t work there. It inforces my feelings that this employer is completely illegal in doing this. Doesn’t federal law specify that work over forty hours a week is at time and a half?
j/k