Jas Carillo was discussing summer employment with Maria Perez, president of Valparaiso Construction Service:
Maria: I'm glad that you're thinking about joining us for the summer. We could certainly use the help.
Jas: Sounds good. I enjoy outdoor work, and I could use the money to help with next year's school expenses.
Maria: I've got a plan that can help you out on that. As you know, I'll pay you $4 per hour; but in addition, I'd like to pay you with cash. Since you're only working for the summer, it really doesn't make sense for me to go to the trouble of formally putting you on our payroll system. In fact, I do some jobs for my clients on a strictly cash basis, so it would be easy to just pay you that way.
Jas: Well, that's a bit unusual, but I guess money is money.
Maria: Yeah, not only that, it's tax-free!
Jas: What do you mean?
Maria: Didn't you know? Any money that you receive in cash is not reported to the IRS on a W-2 form; therefore, the IRS doesn't know about the income "hence, it's the same as tax-free earnings.
a. Why does Maria Perez want to conduct business transactions using cash (not check or credit card)?
b. How should Jas respond to Maria's suggestion?
Maria's not actually entirely correct, and this shows that she doesn't really know the income tax laws. We can see this in this statement: "Any money that you receive in cash is not reported to the IRS on a W-2 form; therefore, the IRS doesn't know about the income." Maria is confused regarding the tax laws. It doesn't matter how an employee on a W-2 is paid, meaning whether it's by cash or check. I can have you as an employee on a W-2 and if your net earnings are $200 for the week, I can pay you by check for $200 or give you $200 in cash. It doesn't matter. The $200 is still reported as part of your gross earnings on your annual W-2 form. There are many retailers that pay employees in cash; primarily because they deal mostly in cash and write very few checks (small grocery stores are famous for paying employees in cash).
If the worker is not on payroll, he or she can be paid either ...
This solution provides an extensive discussion to each question involved in the Jas Carillo and Valparaiso Construction Service accounting case.