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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. Tim says:

    the problem with doing stuffing in cash is the exact point you mentioned: you can do it under the table without a paper trail. the problem with this is that it also gives you no recourse in the event something you purchased, etc, does not pan out.

    it is the responsibility of the merchant to pay taxes as is the responsibility of waiters to do the same. If you pay in cash, and you are afforded a discount, it isn’t you who is responsible for the taxes nor is it you who forced the merchant to discount for paying in cash. You aren’t telling the guy/girl to not report the sale or full tip. There is no moral dilemma involved on your part.

  2. CK says:

    Jimbo-

    When you advocated tipping in cash you did so specifically so the waitstaff could avoid taxes. If you are advocating payments in cash for the same reasoning I’m not with you, if you’re just looking for a discount for yourself and don’t know how you are getting it I’m all for it. Besides that I’ll second what Tim has said.

    • Alec says:

      So if you made 4 or 5 dollars under minimum wage it’s wrong to try and skirt taxes sometime just to feed your family? Tipping with cash helps the waitor or waitress. I see it as an ethical issue to force some family to go a night without food just because you feel that the corrupt government should take their money to go france. I see you “CK” as a monster and Jim wang as a visionary. We should all help other people instead of being stuck up because someone out there has helped you and asked for no compensation.

  3. jim says:

    I think the difference was in phrasing because ultimately what you do and what the waiter/business does is independent in so much as one doesn’t necessarily cause the other (though paying cash does enable potential fraud)… but in the previous case I was advocating cash because wait staff can avoid taxes whereas in this case I phrased it as a bargaining strategy.

    Fundamentally, I think the two are very similar with the key difference of using cash as a bargaining chip being less magnanimous because you get something in return (whereas you get nothing in return for a cash tip) and so it’s more palatable for someone to bargain with cash (or at least convince themselves their hands are probably clean) but fundamentally the two are one and the same.

  4. Rob Carlson says:

    Assuming this is a transaction with no contract or receipt, like a car tow. How far should we go to prevent someone from cheating on their taxes?

    1. The vendor says “if you pay cash, I don’t pay tax on it and I’ll pass half of it along to you.”

    Direct involvement. Few would argue that you are profiting from tax evasion.

    2. You pay cash and get a discount without discussing why. The vendor may or may not report the cash payment.

    Potentially indirect involvement. You don’t know why the vendor is giving you a cash discount. Even if its more than a few percentage points off, maybe they want to avoid the credit card because they have cash outlays that are due in the next few days and they can’t wait a few weeks for the credit card company disbersement. The money right now is worth more to them than the money later, and they pass it along to you.

    You might speculate that tax evasion has something to do with it, but you have no proof.

    3. The vendor tells you outright that your cash discount is because they need cash flow now, and they’re willing to cut you a break for that.

    They might be lying to you, but its reasonable. Should you turn down the deal on the off chance that the vendor MIGHT cheat on his taxes in spite of what he told you? At this point worrying about someone else’s taxes turns from concientious to paranoid.

    4. You pay cash and don’t get a discount, the vendor may or may not report the cash payment.

    Few would argue that there is a moral issue here. You chose to pay cash over credit and didn’t get anything in return except the services rendered for your payment. Even if they’re cheating on their taxes, you didn’t profit off the exchange. Should you be their guardian angel and pay with a check or demand a receipt anyway?

  5. I don’t usually buy thing in cash. Usually something I want is from a big store because it’s still cheaper than small merchant. Small merchants can’t afford to give a huge discount.

    So a cash discount? Usually on on used stuff.

  6. jim says:

    Rob: Is it even your responsibility to make sure someone else pays their taxes? If so, why?

  7. Tom says:

    The interchange fee is like a secret tax. Through a contract agreement, Visa and MasterCard make it virtually impossible for merchants to offer a cash discount. They have a monopoly on the card processing industry and consumers are force to deal with these in the form of higher costs yet they don’t even know it.

    you can get more information on this through UnfairCreditCardFees.com, sponsored by an organization I’m working with – Merchants Payment Coalition.

  8. Rob Carlson says:

    @jim

    I think if you collude with someone, you legitimize the fraud. If you do it how can you complain when corporations set up questionable tax shelters and evade their taxes on a grander scale?

  9. jim says:

    But in neither case would one have colluded with the other party, in one case the post recommended paying in cash because the waiter could evade taxes and in the other it recommended paying in cash because the business might give you a discount, oh and they might give you a discount because they might evade taxes. It’s very gray…

  10. Posco says:

    @Rob,

    I don’t see how getting a discount by paying in cash would implicate me in tax evasion. Case: I negotiate a lower price for services by paying in cash. Seller says this is because he doesn’t have to pay taxes on the sale. I sign a contract or receipt listing the services paid for and the cash price paid. There’s NOTHING on the contract or receipt that says anything about tax evasion. I pay for the services. I receive the services.

    Now, if the IRS is going to come after me for colluding to evade taxes, I have my records straight: I paid cash for services received. I have the documentation that proves it. The seller also has a copy of the contract or receipt. If the seller neglected to include that documentation in his income, that’s HIS PROBLEM, not mine.

    I think the key is documentation. If you’re paying in cash, you need the paper trail to stay clean.

  11. I make the assumption that if I’m offering to pay in cash it’s simply to avoid the credit fees. I’d offer to tip in cash if it was more socially acceptable to give 1-2 dollars and get similar savings. I’m all about paying for cash when it saves me money in any transaction, but that’s because it’s aids me. I don’t take into consideration what the other party is going to do tax-wise, nor do I care. My goal in any transaction is to get the most value out of the least money.

  12. samerwriter says:

    I think intent is everything here. There’s nothing wrong in general with tipping in cash. There is something wrong with tipping in cash specifically so the waiter can evade taxes.

    There’s nothing wrong with paying a contracter in cash. There is something wrong with paying in cash so that he can evade taxes.

    If your contractor offers a 20% discount for paying in cash, an educated person knows exactly what he’s doing. In my opinion, accepting the discount in that case is ethically wrong. In fact, at that point in my opinion giving your business to the guy at all is ethically wrong. It’s akin to buying a car stereo at a 75% discount from some guy on the street. You _know_ you are enabling a crime and encouraging the criminal to continue stealing. Perhaps you aren’t legally responsible, perhaps you are. I suspect in some cases you may be. But regardless, it is ethically wrong.

    Of course that puts you in an awkward position of only paying full price even when you pay in cash. Then it’s quite possible that the contractor is evading taxes _and_ pocketing a big bonus for his trouble.

  13. samerwriter says:

    Are you sure that you can’t be held responsible for someone else’s failure to pay taxes? I doubt that a written agreement is necessary to show a conspiracy has taken place.

    If the seller tells you that he’s charging you less because he doesn’t have to pay taxes, I’d think that makes you party to his evasion.

    Let’s say, completely hypothetically, that he fesses up to the IRS that he didn’t pay his taxes. And that he told you about it. And that you agreed to it with a wink and a nod so long as it wasn’t in the contract. Are you now going to lie to the government about it? If you can claim that you weren’t crossing an ethical line before, even the most ethically lax would have to acknowledge you’re crossing a line by lying about it later.

  14. Matt says:

    I’m on record being totally 100% cool with helping people avoid taxes wherever and whenever they can. It’s flat-out unfair that the best tax-avoidance strategies are realistically available only to people who are relatively rich. (And I include myself in that category.)

    I have more moral qualms with helping them cheat on their credit card merchant agreements (which universally prohibit cash discounts) than their taxes. But ultimately the reason I’m being offered a discount isn’t especially relevant to me…I just take it, assuming there isn’t some good reason on my end to strongly prefer another payment method.

  15. wanzman says:

    Well, considering the huge mess this country is in when it comes to social security, medicare etc., I think I would actually go out of my way to make sure people pay their taxes. While I might get a small discount today by paying in cash, if enough vendors and enough people in general think it is OK to not pay thier taxes becuase they received cash, then eventually tax rates will be raised to make up for this extra shortfall in revenue. I mean, the deficit it HUGE already WHY ON EARTH why I want to do anything that might possibly add to that??? When I am 50 years old, I do not want to be paying 80 or 90% of my income to taxes.

    Even if you do not think it is your RESPONSIBILITY to make sure other people are paying taxes, think of it as protecting yourself. You work hard and pay taxes (I assume), so do you not believe that others should do the same?

    I know that a small vendor not paying tax on little bit will not double the deficit, there is no way to tell the impact that tax evasion has had on this little (huge) mess the U.S. government has gotten all of us into.

    • Anonymous says:

      You’re the gov’t favorite tool, old worry about everybody else guy!im gonna start a cash only business and never pay taxes to our piece of shit gov’t, they will just waste it anyway..fuckyourself

  16. jim says:

    Wanz… the reason why we’re in this mess is because the politicians are doing what regular people are doing with respect to debt… running up a huge bill, except they don’t have to pay it, we do. Or our children would. Plus the shortfall is mostly offset by the overpayment of taxes by other people, at least according to CNN Money’s often published articles.

    That being said, I still think the business should pay taxes.

  17. zen says:

    Have I paid cash for items? Yes. Tips? You bet – but not just for “tax evasion” potential.

    It’s been awhile since I’ve actually carried a large sum of cash anymore – most often it’s plastic. With my recent need for car repairs, it’ll certainly be interesting to see what approach the mechanic takes.

  18. Golbguru says:

    I rarely use cash for most large transactions (in which tax really matters) but if a merchant presents me with a huge discount on a cash purchase, I would probably go for it. I don’t think I am going to worry about “will the merchant pay his taxes if I pay him cash”…I don’t consider that as my responsibility.

    Taxes should be a part of everyone’s personal accountability. If a business wants to evade taxes, it will do it in some way or other (whether I pay in cash or not). Of course businesses should pay taxes, but it’s not my prerogative to oversee how they handle their taxes. If I start making other people’s honesty as my prerogative, I would probably have to stop dealing with half the people in this world (For example, I buy stuff from eBay, make payments through Paypal…etc., how and why should I worry about what people are doing at the other end of such transactions?)

    Jim, also I think there is a difference between a cash transaction without a receipt and a cash transaction with receipt. Or am I mistaken? As far as I perceive it, only cash transactions without receipts carry the burden of unaccounted cash…and cause problems like Tim mentions in the first comment :”the problem with this is that it also gives you no recourse in the event something you purchased, etc, does not pan out.”

  19. Schwartz says:

    I work with restaurants on a daily basis as a consultant.
    ALL independently owned small businesses hide income one way or the other.
    If you want a world where every small business owner pays every penny and uses plastic instead of cash, get used to eating at applebees/chili’s, and shopping at Wal-mart. Your small towns will dry up, all local flavor will cease to exist. If you don’t believe me, it’s already happening. With the rising cost of food, the horrible economy where people don’t eat out as much, and the fact that no American kids want to work hard small business owners are working their tails off to scrape buy and they’re closing.
    Ya think the national deficit’s gonna go down if they start paying 100%?
    Think Again.

  20. Pugs says:

    I see what everyone is saying…But let me pose this question to you…I was at a boutique store that offered 50% off the entire store due to the owner going out of business. At the time of purchase I took my credit card out to pay and the saleswoman said, “Cash only.” So, I inconveniently had to go to a nearby ATM, being that they would not hold my merchandise and take out the cash. After I paid I checked my receipt and saw that although I paid cash, I was still charged $40.00 in tax! So, what do you think? Is it at all ethical or legal to say Cash only and then charge the tax on top anyway??? P.S. I am not at all happy with that so called “deal!”

  21. Lisa says:

    It seems kind of like a catch 22. I mean you pay for clothes or food sometimes in cash, so how would that be “no paper trail” or illegal? I mean I still have to pay the sales tax. I got my employee discount at work, but still have to pay the taxes, which is only fair. I was told, so that I wouldn’t back out of my order, that I had to pay cash..no problem. You see, my company makes and maufactures windows, so if someone places an order, then like days after it’s already been in production, backs out. That company is left with windows that were special ordered. SO If someone walks into my office RIGHT NOW to make an order, and they don’t have an account with me (nor have ever done business with me) I do require a cash deposit, which is then used TOWARD the sale. Most of these customers pay up front in cash. If I offer them a discount, they get it off the pricing BEFORE I calculate the sales taxes. So I believe there is no illegal activity in doing this. ONLY if the company failed to pay the taxes on that sale.

  22. not says:

    I usually apologize to people when paying for service with a check. With the comment….they are just going to give it to some thug dictator or banker anyway.

  23. Brian says:

    Here is the moral question. Is it right that the 30-40% of people who don’t pay taxes get to vote? If they were not allowed to vote how would the governments expenditures change? I would bet they would be lower and the taxes would be lower. This doesn’t justify the act but the government has opened Pandora’s box by bailing out the big guys. I’m sorry but between local, state, federal and sales tax, I’m well north of 40%. Enough is enough. It is like being a frog in water that is slowly raising to a boil.

  24. Conan says:

    From a legal perspective, you are always supposed to pay your taxes. But from a moral perspective, I am beginning to feel like sending money to washington is like sending money to a crackhead. If you know they are out of control and just plain stupid, why should there be a moral obligation to send the money there?? Again, the legal question is settled here.. but I am speaking strictly from a moral/pragmatic perspective.

    In many ways, I feel like by paying taxes, I am contributing to a fat, unhealthy monstrosity, who is totally out of control.

  25. Donna says:

    Moral and Ethical? The government…I don’t think so. We are obligated to pay taxes, but I think we are at the point where we have to provide our own tax breaks. The business person has to do what he has to do and the consumer does too. I just wish those who are laying around getting fat off the fat of the government would get up and exercise their right and obligation to pay taxes too.


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