Cash Payments in Lieu of Fringe Benefits

Business Tax


We suspect that one of our contributing employers is making cash payments to employees for work covered by the collective bargaining agreement and is not making fringe benefit payments for those payments. What can we do?


The plan should have access to the employer’s cash disbursements journal, the entity’s general ledger and the income tax return of the entity (for a partnership or corporation) or the owner (if the entity is a sole proprietorship). The cash disbursements journal should show the cash payments. The general ledger and tax return should indicate where (i.e. which account) the payments were charged. Normally, the charge will be to cost of sales. If so, then the payments were either for materials or labor. If the employer says the payments were for materials ask for invoices supporting the payments. If the employer cannot provide satisfactory support for the payments, the payroll auditor should divide the amount paid (and unsupported) by the prevailing wage rate for a journeyman and treat those hours as a deficiency.

If the employer makes the cash payments “off the books” the payments will still normally be deducted for income tax purposes and the net income shown on the general ledger and the tax return will not agree. Once the cash payments “off the books” are determined then hours can be determined as shown in the preceding paragraph.

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