Be cautious when paying independent contractors in cash

| Aug 16, 2019 | Tax Controversies

Particularly for some smaller to mid-sized businesses in the greater New York area, it may be easier to pay certain bills under the table, that is, in cash or otherwise outside the business’s normal accounting system.

There is nothing illegal about doing this per se. In some cases, it may even be convenient to do so. For instance, it might be simpler to pay someone who shovels the walk occasionally on the spot and in cash. In other situations, the person performing a service for the business may simply prefer a cash payment for perfectly legitimate reasons.

However, business owners in the White Plains area, and, for that matter, even private individuals who hire people to do work for them, need to be aware that cash payment present certain legal issues which could lead to tax controversies.

For instance, someone who pays an independent contractor in cash still has certain obligations to report those payments to the taxing authorities. By way of example, a New Yorker who hires independent contractors has a duty to prepare what is called 1099-MISC for the use of the Internal Revenue Service.

Likewise, the person must verify that the business or individual they are paying has a valid tax identification number. Otherwise, he or she must withhold some of the payment for tax purposes.

Finally, anyone who uses independent contractors should always be careful that these people are not legally considered employees for tax purposes. Unlike the case of an independent contractor, an employer of an employee has an obligation to withhold payroll and other taxes, a responsibility which makes cash payments problematic on a number of levels.

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