- Days left

Getting Paid in Cash? Don't End Up Like Lindsay Lohan

Lindsay LohanFor the millions of American workers who have income and payroll taxes withheld from their paychecks, it's easy to understand the appeal of a job where you get paid in cash and, presumably, out-of-sight from the tax man.

For Lindsay Lohan, though, the dream of tax-free cash payments appears to be turning into a nightmare.

According to Fox News, the IRS is taking a hard look at the fees that Lohan receives for making appearances at certain events. Of particular interest is the fact that the celebrity always asks to be paid in cash.

With the IRS already having seized Lohan's bank accounts for unpaid taxes, the cash requests certainly have the appearance of trying to shelter income from tax authorities.

Dealing With Cash Businesses

Lohan's issues are extreme, but anyone who primarily does business in cash runs into the same issues. For businesses that receive cash, accounting for every single transaction is burdensome and time-consuming. Moreover, the temptation to pay workers under the table is particularly strong, as even bringing on part-time help as employees requires a huge amount of paperwork to satisfy state and federal requirements.

Meanwhile, employees who get paid in cash face similar dilemmas.

Even if you want to comply with the tax laws, it can be tough even to get the required tax forms from your employer -- and extremely difficult to put together tax returns and pay appropriate taxes with incomplete information. Moreover, if your employer pays you under the table, it's all too likely that you're not having taxes withheld from your check.

As a result, you may not only have a big tax bill to pay at the end of the year but also not get appropriate credit for your work in terms of calculating Social Security and other government benefits.

Don't Be Tempted

Those burdens make simply taking the cash and trying to stay below the tax man's radar seem easier. But the IRS has tools at its disposal to help it catch those who decide that a cash-based business is an opportunity for tax evasion.

For one thing, tax reporting requirements tell the IRS when one party in a transaction is playing fair and the other isn't. For instance, if an employer files a W-2 or 1099 form reflecting the amount it paid you, you'll get yourself into trouble if your own tax returns don't have a matching entry that verifies the employer's report.

Similarly, if you're a cash-based employer but your employees report getting income from you, you'll have a hard time justifying tax forms that don't produce enough profit to finance your workers' wages.

Watch Out for These Red Flags

There are several areas where cash payments are more likely to raise red flags:
  • If you have a nanny, babysitter, housekeeper, or other household employee, you may need to pay what's called the "nanny tax." In 2012, those who pay more than $1,800 for household services have to pay the employer's share of payroll and unemployment taxes. In addition, you have to withhold the employee's share of those taxes from his or her pay.
  • To evaluate businesses that primarily involve cash, the IRS has a variety of simple tests auditors use to estimate whether the figures you report pass muster. By looking at bank deposits, cash transactions, and even spending habits, an audit can easily uncover inconsistencies between amounts you report and what you're actually earning.
  • If you're a worker and receive money in cash, try to get a W-2 form after the end of the year if you're an employee, or a 1099 if you do work as a contractor. If you don't get one, IRS Form 4852 (opens a PDF) gives you the ability to provide your own figures in order to get proper credit for any tax withholding as well as retirement benefits.
These requirements may seem intimidating. You may feel tempted as a result to do whatever it takes to avoid an IRS audit, even if it means paying more in tax.

But don't let the fact that you deal largely in cash stop you from taking all the deductions you're entitled to receive. You'll need to be diligent in hanging onto receipts for expenses, but by making sure you have a paper trail documenting both your income and your expenses, you'll put yourself in the best possible position to survive an IRS audit if it comes.

Motley Fool contributor Dan Caplinger once had to rat out an employer who didn't report his pay. You can follow him on Twitter @DanCaplinger.

Increase your money and finance knowledge from home

Timing Your Spending

How to pay less by changing when you purchase.

View Course »

Introduction to Retirement Funds

Target date funds help you maintain a long term portfolio.

View Course »

TurboTax Articles

Video: Tax Guidelines About Gifting

Note: Some of the content of this video applies only to taxes prepared prior to 2012. It is included here for reference only. Find out the tax guidelines about gifting with help from TurboTax in this video on tax tips.

Video: What are Income Tax Rates?

Note: The content of this video applies only to taxes prepared for 2010. It is included here for reference only. Income tax rates change depending on both the amount of money you make and how you made it. Find out about income tax rates with help from TurboTax in this video on tax tips.

Video: How To Reduce Errors on Your Tax Return

Did you know that errors on your tax return can affect the amount of your tax bill and the amount of time it takes to get a refund? Fortunately, TurboTax helps you avoid errors AND be sure you're getting all the tax deductions and credits you deserve.

Does Your Company Need to File Form 1095-B?

A company is responsible for filing IRS Form 1095-B only if two conditions apply: It offers health coverage to its employees, and it is "self-insured." This means that the company itself pays its employees' medical bills, rather than an insurance company. A company that doesn't meet both conditions won't have to deal with Form 1095-B. Its employees might still receive a 1095-B, but from their insurer, not the employer.

Video: Who Qualifies for an Affordable Care Act Exemption (Obamacare)?

The Affordable Care Act requires all Americans to have health insurance or pay a tax penalty. But, who qualifies for an Affordable Care Act exemption? Find out more about who qualifies for an exemption from the Affordable Care Act tax penalty, how to claim an exemption on your tax return and how the Affordable Care Act may affect your taxes with this video from TurboTax.

Add a Comment

*0 / 3000 Character Maximum


Filter by:

Anyone who deals mostly in cash tranaction is trying at least to hide income. People like her have all kinds of accountants and other people who are supposed to deal with things like this.

December 11 2012 at 9:53 PM Report abuse rate up rate down Reply

Yes, Obama's the leader that we need.

December 08 2012 at 8:05 AM Report abuse rate up rate down Reply
1 reply to Randy's comment


December 08 2012 at 9:55 PM Report abuse rate up rate down Reply

Don't ever be fooled into thinking that your actions don't have consequences Lindsay. Shortcuts will lead you down dark roads until you crash, just ask anyone in jail and they will confirm that one. You reap what you sow.

December 07 2012 at 11:19 PM Report abuse rate up rate down Reply

Well since Charlie Sheen offered to give Lohan $100,000. to help pay her taxes, Whats the beef??.

December 07 2012 at 9:38 PM Report abuse rate up rate down Reply

Don't ever forget to pay your taxes. Lohan belongs in jail and she tries really hard to get there.

December 07 2012 at 9:23 PM Report abuse +1 rate up rate down Reply

What's the difference getting paid in cash from getting Welfare and hundreds of paid free Entitlements for being Black, Illegal or some other minority that knows how to work the system???

December 07 2012 at 8:30 PM Report abuse +3 rate up rate down Reply

Lohan thinks she is above the law. hope she gets what she devers and a good time BEHIND BARS LIKE SHE DESERVES.

December 07 2012 at 8:03 PM Report abuse rate up rate down Reply

She should be paid just for having a beautiful rack.

December 07 2012 at 5:39 PM Report abuse -1 rate up rate down Reply

How about the other way around, the ******* MILLIONS OF ILLEGALS WHO GET PAID CASH ? And dont pay taxes but CAN VOTE ???? HA.......HOW ABOUT THAT !!!!!! AND WHATS MORE THE ******* EMPLOYERS WHO REAP THE BENEFITS OF NOT Having to pay workers comp, social seciurity match federal and local taxes match on those employees. As I sit here paying a ******* fine to the irs for being late with my witholding taxes 20% ,,,,,,,,,,,,,,,,,,,,,,,20% A FINE FOR USING LEGAL PEOPLE AND SURRENDERING TAXES A WEEK LATE !!!!!

December 07 2012 at 3:47 PM Report abuse +5 rate up rate down Reply
1 reply to jmnardihrt's comment


December 07 2012 at 7:53 PM Report abuse +4 rate up rate down Reply

Even Uncle Sam is taking a ride on that thing.

December 07 2012 at 3:45 PM Report abuse +1 rate up rate down Reply