Wages Paid in Cash

searcher profile

November 29, 2024

by a searcher from Southern Methodist University - Edwin L. Cox School of Business in Dallas, TX, USA

Does anyone have experience diligencing businesses that pay a significant portion of their payroll in cash? Seems like a giant red flag to me but maybe I'm mssing something.

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commentor profile
Reply by a professional
in Janesville, WI, USA
Yes, we have caught this multiple times. A few ways I've seen it happen:

- Customer pays in cash for whatever reason. The cash is then used to pay employees. No revenue or expenses are reported and no net impact on EBITDA outside of payroll taxes. There is risk that the employees are used to this treatment and push back on changing it due to proper tax reporting.
- Employer takes cash out of the business. It is booked as an expense but is being improperly paid outside of payroll to avoid taxes. Payroll taxes will be understated and there is similar risk as stated above.
- Employer taxes cash out of the business. It is booked as a distribution. This can have a huge impact on EBITDA and you will get a ton of push back from employees post-closing if you change this process.

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commentor profile
Reply by a professional
from Walsh College of Accountancy and Business Administration in Detroit, MI, USA
A common issue with small companies and I see it all the time. You will need to consider the structure of your acquisition for tax purposes after you get past the impact on EBITDA and your purchase price. If you buy equity, you will have continued liability for all payroll taxes. If you buy assets, you will be concerned with successor liability for state taxes, depending on state law. The federal/state government can go after responsible persons (as defined in the federal/state law) if the company does not pay the taxes if audited and discovered.
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