I recently had a business owner tell me he stopped using his payroll processing company and was paying his employees in cash, without deducting and paying payroll taxes. Banking and cash issues left the company with limited ability to find an easy way to pay and process payroll. Their solution? Pay cash and deal with the taxes later.
However, this strategy increases the risk of an audit from the EDD with fines and penalties. In addition, the EDD can share their information with the IRS. This can kick off a whole host of issues for any business, but particularly a cannabis business. Once a company has the attention of government agencies, others tend to find their way to the company, like a beacon to lions that an unattended calf is in their midst, easy lunch.
Payroll taxes in California are about 12% of payroll. It is not worth the risk to pay employees cash without taking out taxes. My suggestion, if you cannot afford payroll taxes, reduce payroll by cutting hours, reduce pay (temporarily), or reduce headcount. This also gives the employees an opportunity to apply for unemployment benefits until you (the company) can afford the employee.
Employees who are paid in cash do not receive paystubs. This is a problem if they need to provide income verification for house purchases or buying a new car. One can understand how upset an employee is when they realize they will lose the house they worked hard to obtain because their employer did not take out and pay payroll taxes and cannot provide proof of income.
Employees who are paid in cash risk their ability to apply for unemployment insurance or disability insurance through the EDD. Because payroll taxes are not paid, the UI and SDI aren’t paid, and the employee is not eligible for benefits. This can put an employee in dire straits when they need the income the most.
Unhappy employees tend to sue and desperate people do desperate things. By not paying payroll taxes, you open your company up to agency audits, fines and penalties, and unhappy employees who like to seek counsel and seek restitution.
Is it worth putting your company at risk? The one you worked so hard for? It has been a long road for cannabis, and it is still ripe with issues that hinder profitability. Do not add to the drama or risk to your company. Call an expert if you run into problems and know your rights and risk.