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Patrick, Esq.
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Category: California Employment Law
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What is the penalty to an employer if a former employee makes

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What is the penalty to an employer if a former employee makes a claim that he was paid in cash?
Good evening and thank you for entrusting me to assist you. My name is XXXXX XXXXX I will do everything I can to answer your question.

There is nothing inherently illegal about paying an employee in cash--in fact, Calfornia Labor Code sections 212 and 226 specifically permit payment by such means.

Although payment by cash is legal, an employer paying in cash still must make the required deductions and withholdings as they would with a check. The employer also must provide a paystub which documents the number of hours worked and the hourly rate at which such time was paid. These requirements exist regardless of the monetary form the payment of wages the employer selects.

I believe this answers your question, but by all means please reply back if anything is at all unclear or you have followup questions.

If you do not require any further assistance, please be so kind as to provide a positive rating of my service so that I may receive credit for assisting you. Very best wishes and kindest regards.
Customer: replied 3 years ago.

Thank you, XXXXX XXXXX question is: not only did I pay him in cash but I didn't withhold and taxes, and there was no pay stub. If this employee rats me out to the labor board what will happen to me? How much of a penalty? Thanks.

Thank you very much for clarifying.

I am afraid that if an employer is paying a worker "under the table," presumably without workers comp insurance and without making deductions for payroll tax, social seurity, employee tax withholdings, and not providing regular paystubs, the potential ramifications are quite severe, as this essentially amounts to a number of entirely separate legal violations rolled up into one.

First if the failure to maintain and pay for workers compensation insurance. All employers must carry such insurance for every employee, and a failure to do so is punishable by a fine up to $10,000 or in egregious circumstances, criminal charges. (See Labor Code section 3700.5.

A failure to pay payroll tax (these are the deductions for Unemployment Insurance, Employment Training Tax, State Disability Insurance and Personal Income Tax that an employer must make on every paycheck) will be regarded by the Franchise Tax Board as tax fraud, the penalty for which, among other things, is repayment of the sums that should have been deducted all along, plus interest.

Then there is the failure to provide paystubs, which is a violation punishable by a $100 civil fine for the first violation and a $200 fine for each violation thereafter. Since employees must be paid twice a month, a consistent failure to provide paystubs will essentially result in $400 a month in fines for the duration of the employment.

These are the most noteworthy consequences of paying an employee under the table.

Again, please feel free to let me know if you have any further concerns.
Customer: replied 3 years ago.

Oh ok, that is steep. Someone told me that I could face fines of up to $150,000!! Is that way off?? Can I go back and pay back payroll taxes on this employee and cover myself from future potential problems?

Well, the Franchise Tax Board does have the authority to issue civil penalties in the event of a finding of tax fraud. The State can also issue penalties of up to $100,000 against employers without workers comp insurance separate and apart from any criminal proceeding, so I can see how someone would have ballparked the "worst case scenario" exposure so high. Realistically, though, these are maximum penalties that are imposed to their fullest extent only in the most egregious and systematic of violations. Your likely exposure is far less.

Here on Just Answer we cannot provide specific legal advice and so I cannot recommend a particular course of action for you. I can say, however, that if being reported is inevitable, a prompt repaying of all owed taxes would ordinarily be wise.

You would be well-served to consult with a tax professional to determine the logistics of that approach, as well as the precise amounts you'd need to repay, and since I am not a tax expert I will have to defer to their opinions on that issue.

Simply in terms of mitigating consequences, though, preemptively paying the taxes will usually soften the blow substantially.

I hope this helps.
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