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Paying Cash, Avoiding Tax, An Ethical Dilemma?

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One of the best ways to negotiate a discount on a job or sale is to offer to pay for it in cash. There are a multitude of reasons why this is the case but if you ever want to knock a few dollars off, consider offering to pay in cash and see what the business says. This won’t work if you’re talking to a large national business and a salaried employee with very little latitude but it will probably work for everyone else.

Two of the main reasons why this works are totally benign but the third reason, in red below, is the biggest reason why this works and it’s along the same lines of a post I wrote in the past about paying tips in cash.

Credit cards have fees

When you pay with a credit card, the credit card company (and all the third party middlemen) extract a fee that amount to a few percent. When you offer to pay with cash, the business doesn’t have to pay these fees and so you can usually get a small deal out of it.

Financing has risk, cash does not

If you finance through the business (actually a bank or lender that has a relationship with the business), there’s an inherent risk involved because you might default on the loan. You can’t default on cash.

They can do potentially do the job or sale off the books

This is probably the biggest financial reason why a business would might give you a little discount, though they won’t say it, if you pay with cash – there’s no paper trail and they can avoid paying taxes on the income. If you view tax as an expense, such as building supplies, if you could suddenly do a job without paying 30%, you’d probably offer a discount for the job too. Unfortunately, this expense is nationally unavoidable and it’s illegal.

Now, back when I wrote about paying tips in cash, many readers left comments chastising me for recommending you pay tips in cash because you would be helping the wait staff, if they chose to, avoid taxes by underreporting their tips and thus avoiding tax. Now I pose this question to you (especially if you said paying tips in cash was ethically wrong), have you ever negotiated a deal using cash and do you see this as ethically wrong? Remember, you’re not doing anything illegal, the business owner may not skirt out on taxes, but by virtue of paying in cash it is possible that you could be enabling an illegal act (similar to the paying tips by cash, except this time you benefit too). I’m very curious to see what everyone says about this scenario!

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37 Responses to “Paying Cash, Avoiding Tax, An Ethical Dilemma?”

  1. Mike Rieselman says:

    What a bunch of ignorant experts. It is always better to pay cash. If you buy a house you can get up to a 40% off the asking price, a car, the same. Do not deal with anyone who won’t take cash because they are criminals. Tax has nothing to do with it. You save points, interest, agent fees, credit bullshit and all of the other crooked charges banks have used to steal a trillion from the taxpayers. Anyone who does not want cash is a liar or a fool. Paying your taxes is a law everyone is held to and it has nothing whatever to do with this discussion.

  2. aaa says:

    Is the government doing everything ethical? waging wars from our tax money to kill inocent people all over in the world. They just make you fool into believing that you are doing something wrong by not paying taxes. I pay taxes when I get paid my salary then when I go to buy something, I have to pay tax again. So oveall I am paying ( 25 + 9 = 34%), I will try to save money whereever I can and screw the government.

  3. Gail says:

    I have had the unfortunate experience of buying a car service from a municipal councilor who also has 2 side businesses. He immediatley asked if “I needed a bill”, meaning you don’t pay tax and either will I.

    I have had a lump in my throat since, knowing he happens to be the councilor for my own town.

    I mentioned it to a couple others whose attitude is very much the same….if you can get way with it, why not?

    BEG TO DIFFER. This is not just some guy and furthermore, without a paper trail we may not pay tax but we also have no leg to stand on shuold the service or product fail.

    What world do we live in.

  4. Nay says:

    Being a new business owner (my daughter) she of course is small business who sells beads. As of now the beads she purchase do not reflect the overhead of credit card purchases, (most pay cash, few with checks) but, she knows that her “new” inventory will eventually have to reflect the higher cost becasue she will need to obtain a merchant acct soon. For those paying cash, is it wrong to give them a 2% to 5% discount (that would equal to several single beads and in some cases a full strand, and would be worth using cash) She’d like to give this incentive not to avoid but, to keep the cost down for the customers, who really love the fact her beads are at the lower price. Once she begins accepting Credit Cards she’ll have a much added cost including the terminal, internet (the transactions go thru the net) the cost of paper for the terminal, the surcharge for each transaction, not to mention *chargebacks even by mistake would really hurt her as well as stolen cards) For a small business to absorb that kind of cost is tremendous, larger businesses can better absorb that sort of thing (not good for either). So, for her to be able to give a discount for using cash it would really help her. But, is it legal to give the discount for using cash? We understand, there are ppl who do it for the wrong reason, but there are ppl who do it and pass the savings on to their customers.

  5. JustSayin says:

    @Gail.. Not being mean, but you say “he” well, in fact you both seem to have avoided the tax man (you could have said “yes, please I need a receipt”) it would have been as simple as that then you told ppl about “him” but, you seem to forget you condoned the behavior, by not saying “I need a receipt”. People have a CHOICE to either be fair to the unfair tax man, or not. Is it ethical, well who are you or even I to say it’s wrong (we can really only speak for ourselves). There are many people who work paycheck to paycheck that sturggle(even sm business owners). As for my business, I’ve never once thought I’d never “tell all” because for me it’s just how it is. There are many business owners who tell me not to do that, but ya know this is the way it is for me. I ened up owing a ton of money, it su*ks to have to owe when I am a single parent, no Medical, No Reiterment and now all my savings gone… and for what I worked 80+hrs I slept maybe 2-3hrs a nite I told the truth and I have nothing to show for it. No Medical, No Reitrement, No savings.. Yes, loved what I did, but is it worth it, not after seeing my tax bill.. (would I do it different) Truthfully I’m not sure now. But, now I understand why those other business’s didn’t report “every” transaction. Question, if you sell something on one of the many selling sites or have a yard sale, do you report it to the governement as income? I bet not… Is that ethical? There are greedy people but there are also people who are just trying to get by. JMO

  6. William says:

    This is a personal editorial, a Right of freedom of speech. The IRS never “ASKS” for information, it’s the EMPLOYER without Cited DELEGATED authority to do so. People AGREE to “Withholding” or they don’t get hired. This is called “Voluntary Compliance”. All withholding comes under Subtitle C, EMPLOYMENT TAXES. Not under Subtitle A, income taxes. Is this WHY the IRS does not Cite any sections of the Code with regard withholding? If there is no W-4 there is no agreement to the IRS. Without your signature HOW can the Internal Revenue Code have COMPETENT jurisdiction over your money, which is your property. And you cannot be deprived of property without “Due process of LAW”. This Right of freedom of speech is protected in the U.S. AND State Constitions Bill of Rights.

  7. Tess says:

    Is it ethically wrong??? Why would it be ethically wrong to offer a discount for something that will ultimatly cost the business less? It’s about overhead.

    People often walk into a store, see an item and assume it should cost the same everywhere and that each business makes the same profit buy selling it. NOT the case! There is so much involved in the overall profit of that item.

    Let’s use Walmart for example. Walmart is a huge company. By buying and making HUGE quantities of items they are able to save massive amounts of money on their products. Then you factor in their shipping cost to distribute those items and again much lower cost overall per item. Also their credit card fees are most likely half what small businesses pay because they process so many transactions unlike the 5-10 transactions a small business may do in one day. And let’s keep in mind there are many more things that come in to play with overhead such as rent, salaries, taxes etc.

    This being said it is not only ethical for a small business to give a discount by accepting cash, but its smart. It’s a win win situation for the consumer by saving and for the small business that has quite large credit card fees and overall much higher overhead than huge corporations. Technically the small business is not avoiding taxes but rather factoring them in their cost.

    Like the previous comments say above, its pretty simple to ask for a reciept. What a business does on their own time should not determine the morality of a law abiding, economical individual.

  8. UnfailyFired says:

    I know someone who just lost thier job over a very similar situation – as far as I know – since they started at this company – they’ve been paid via wire-transfers into one of thier businesses – instead of via payroll. This saved the company the social secruty and medicare witholding matching, and allowed the “employee” to pay their taxes whichever way they desired – take additional expense deductions (by treating the employer like a client, travel expenses, for example – travel to / from work to some extent could be deducted) – anyway – all of that is not all that related to the reason I’m even posting this comment – this employer has had serious cash flow issues, and this employee would take less than the total amount due quite often – catching up later on in the days and weeks that followed. the method that they would catch up would be additional wires but recently the catch up was done via ATM withrdawals – cash – and were told the reason why was because it is ILLEGAL to pay “vendors” in cash (even this vendor who in actualty is an employee-which i’m sure is much more illegal than the atm-whatever). When they told me that they lost their job over this – I had to do some resaech – irst is it illegai pay vendors in cash? next – what kind of recourse doeos this person have? she isn’t somone that sues ever so i doubt anything like that would happen – but i just want to know for myself since i pay with cash for my business and to be sure that i’m not doing somthing that is illegal-im ok with not-recommended but plain illegal is a diffrent story!

    Thanx for any feedback…

  9. Allen says:

    Many small businesses pay cash. They avoid withholding income tax, but also avoid unemployment taxes and their portion of social security taxes. Yes, I consider that unethical if it is a regular practice. This will leave many people who have been paid this way with no medical care when they are old, no unemployment compensation when they are unemployed. It also avoids benefits workers on the payroll performing the same job get. It is, if a regular practice, just another tax dodge by unethical business owners, who use it on a regular basis.

  10. Allen says:

    Many people are paid cash or lump sum as independent contractors. There are stringent IRS requirements to be classified as an independent contractor. The most obvious one is to be “independent” meaning not under the control of the contracting person or company to an extreme degree. If a person is essentially an employee and must do as the employer says, that is not being an independent contractor. Paying cash also acn lend itself to violations of the Wage and Hour Laws as it leaves no record. A person can be put on salary, perform a mundane job such as maid in a motel, receive a salary of $200 per week and worked 40 hours. That is $5.00 per hour, which is below minimum wage and is a violation of the Wage and Hour Law. The problem with these rationalizations for paying cash is that they are indicative of the ME-ME-ME-FIRST attitude of far to many people in the world to include the business world.


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