You are allowed to pay your employees in cash. But if you do that you still must withhold (and pay) your Trust Fund (payroll) taxes.
One enterprising individual came up with the idea of paying employees in gold and silver coins. If those individuals are employees, you still have to withhold taxes. But what if you claim they’re independent contractors; after all, there is no withholding on contractors. That’s fair game, but you better make sure they really are independent contractors and not employees.
It gets messier when it turns out the individuals paid in coins almost all immediately converted them to cash. And all were independent contractors, including individuals who were working for companies that were payroll clients of our enterprising individual. And somehow the conversion process is what exempted the wages from withholding.
If you can’t understand how that’s legal, I understand. It sounds to me like fraud and a bunch of sham transactions.
Robert Kahre came up with this plan. It worked well for a while. Unfortunately, the government discovered this and charged Mr. Kahre with 57 counts of tax evasion, real estate fraud, and failure to withhold taxes from employees; he was found guilty by a Las Vegas jury on Friday. (Three other individuals were found guilty of related crimes.) Mr. Kahre faces 296 years and a fine of up to $14 million. Given that the total wages involved is $120 million ($25 million to his own employees and $95 million for employees of client companies), he will almost certainly find his way to ClubFed this November when he’s sentenced.
The moral to this story is simple. If you pay your employees with checks, cash, gold, or silver, make sure the government gets its share.