Cash Wages Omitted From W-2s Can Be Fraud, Federal Judge Rules

A federal judge in New York ruled on Oct. 16 that W-2s omitting cash wages can qualify as fraudulent, clearing eight former car wash employees to pursue their fraud claims against their Hempstead, N.Y., employer. Each fraudulent W-2 can cost an employer at least $5,000 under the federal tax statute the workers invoked, 26 U.S. Code § 7434.

The decision touches every employer that pays any portion of wages in cash. Payroll teams now have a court-backed reminder: cash compensation belongs on W-2s, and knowingly leaving it off can trigger a lawsuit from their own workers — not just an IRS problem.

What do the workers allege?

The eight former employees sued the operators of the Hempstead car wash, claiming the business paid them partly by check and partly in cash. Their W-2s reported only the check amounts, according to the complaint.

The workers argue three points:

• The employer knew about the cash payments.
• The employer knew those wages should have been reported.
• The employer left them off the W-2s anyway.

Under federal tax law, that combination makes the W-2s fraudulent, the workers say. The statute carries a minimum $5,000 price tag per fraudulent form.

What does the ruling change?

The employers pushed back with a narrow reading of the law. They argued that § 7434 only covers W-2s that overstate pay — not forms that understate it.

U.S. District Judge for the Eastern District of New York rejected that argument on Oct. 16 in Hernandez v. Monteiro. The fraud claim survives and the case moves forward.

That matters because it splits from other federal courts. Courts in Colorado, in Balle-Tun v. Zeng-Wong Inc., and in South Carolina, in Queen v. Zefco Inc., took a narrower view of similar W-2 fraud claims. A circuit split could be forming, and HR and payroll leaders should watch this case into 2027.

What should payroll teams do now?

Most payroll professionals don't want to think about W-2s until after Thanksgiving. This ruling argues for earlier attention.

The practical compliance steps are straightforward:

• Audit whether any workers receive part of their pay in cash.
• Confirm those cash amounts flow into W-2 reporting.
• Document the payroll process for cash wages, so the employer can show any omission wasn't knowing.

The lawsuit's core allegation is knowledge. The workers claim the employer knew the cash wages existed and knew the law required reporting them. An employer that can't demonstrate a controlled, documented process for cash compensation faces the hardest version of that argument.

The $5,000-per-form minimum gives workers a direct financial incentive to sue. A business paying eight workers with partial cash wages faces potential exposure well into five figures from this single statutory claim — before any wage-and-hour claims stacked on top.

Employers in states where courts have taken the narrower view shouldn't relax either. The New York ruling gives worker-side attorneys a fresh precedent to cite, and the pending cases in Colorado and South Carolina could still shift.

With the Hempstead case heading toward further proceedings, payroll and HR leaders have a concrete deadline of their own: the next W-2 filing cycle. Getting cash wages onto those forms now is cheaper than explaining them to a judge later.