When we had our first taste of cash, we realized its beauty. Regardless of whether it was a weekly allowance for doing household chores, or payment for mowing a neighbor’s lawn, we can all recall someone paying us with cash. It put a smile on our faces, and allowed us to buy the things we often dreamed of.
As we matured, many of us found ourselves fixing our neighbors’ cars in our driveways, and we were often paid in cash for those services as well. To this day we pass this learned sense of gratitude along by giving cash to people that do small repairs around our houses, and by tipping the server at our favorite restaurant. The intentions are good, and it comes as no surprise that the recipients are always appreciative. Unfortunately, when we become business owners, that practice of paying others with cash is one practice that has to come to an immediate end, and here’s why…
As a business owner, I too know how tempting it can be to give an employee a cash bonus when they’ve gone above and beyond, or when you’ve had a really good week. Their eyes will light up, they’ll smile from ear to ear, it’s not viewed as something that is subject to being taxed, and it’s something they can quickly spend. Unfortunately, at the very moment a shop owner hands an employee cash, there are a number of unintended consequences that occur.
First of all, as the money transfers from the owner’s hand to the employee’s, the owner is signaling to the employee that they are someone that cheats on their taxes. Although the employee knows that there are many people who cheat in this way, it stands to reason that they may very well conclude that if their boss cheats the government, there’s a good chance they can, or will, cheat the employee as well. Yet it doesn’t stop there, because at that very same moment the employee is also drawing the conclusion (rightfully or wrongfully) that the owner will be able to make other cash payments to them, and that they may receive a part of their regular pay (if not all of it) in cash.
Unfortunately, things can quickly become far worse, because if the employee becomes disgruntled, and is no longer with the company, they can make life miserable for their past employer by reporting them for making unreported cash payments. In such cases the government is often more than happy to not press any charges against the employee in return for them testifying against the employer. Any shop owner that has ever been through a tax or labor law audit knows how agonizing (and expensive) such investigations can be, and if that’s not bad enough, if the agency is able to demonstrate tax evasion, it can quickly go from a tax liability for the shop owner to a criminal case.
Now let’s change gears and talk about where that magical, off-the-books cash comes from. Most shop owners that pay their employees in cash (under the table) have a method of generating the cash they’ll need. The most common method is they’ll take cash payments for repairs, and never record the sale on their books. More often than not they don’t realize that making these decisions can be devastating as well.
First of all, by not reporting all of their sales they are opening themselves up to IRS audits and possible criminal charges. Additionally, the majority of their key performance indicators will be off, which makes it harder to judge the true performance of their shops and see the real losses. Furthermore, when it comes time for them to sell their shop, this is when the decision they made to try to save a few dollars by not reporting all of their income, or by paying their employees with cash, comes back to haunt them and often destroys everything they’ve built over the years.
When their shop is listed for sale, any reasonable buyer will want to see and discuss the financial statements. If the potential buyer questions the reported sales, and if they’re told that in reality the sales are higher because some of the sales were not reported (or there is a second set of books), then any reasonable buyer will walk, because they’ll rightfully conclude if the sales figures are not legitimate, why should they presume any of the other numbers to be correct, and why should they trust anything else the seller might say? Ironically, some shop owners feel that all they’ll need to do is simply not tell the potential buyers about the cash transactions, but unfortunately, what they don’t realize is that any intentional misrepresentation, or intentional omission of anything that is considered material in such a sale, is cause for a lawsuit.
Is there a solution? Well, I have some really good news for you, and it’s that “Yes, there is.” Better yet, I know that this solution works because I have helped hundreds of shop owners make the transition from cash, to operating very successful businesses that abide by the law. Here’s all that you’ll need to do.
First, make sure every single dollar that comes into your business is properly reported, and make sure all your employees are paid in a matter that meets with all the legal requirements. If you have an employee that demands they be paid in cash, then one thing is for certain; You have the wrong employee. Secondly, do the three things that all the top shop owners in America do: hire the right people, abide by the law, and hire an accountant that knows how to reduce your tax liabilities in every possible way (that conforms with the law). If you follow this path, you have my promise that you will have a more profitable, successful business, you’ll be able to sleep well at night, and you’ll never have to worry about something as simple as cash destroying your life, destroying the value of your business, and destroying the reputation you have worked so hard to create.