Can You Pay Your Employees in Cash?

Whether it’s because they don’t have a bank account, want immediate payment for their services, or would like to be responsible for their own taxes, some employees may prefer to be paid in cash. However, paying employees in cash can be tricky. Making a business practice of paying in cash can lead to a number of issues, especially when it comes to payroll taxes.

Can you pay employees in cash?

You can pay employees cash. But you must:

1. Be compliant with payroll laws and report all wages to the IRS.

2. Withhold payroll taxes correctly

3. Keep accurate records of employee hours and wages.

4. Be compliant with all unemployment and workers’ compensation laws.

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Are cash wages taxed?

Yes, all wages must be reported, taxed, and declared as income. This includes federal income taxes, Medicare taxes, Social Security taxes, and state income taxes where applicable. Paying employees “under the table” can result in steep fines or even jail time.

For these reasons, it’s important to consult with tax and legal professionals before deciding to pay employees in cash. They’ll be able to counsel you on the rules, including how to avoid hefty fines from the IRS. But to give you the lay of the land, here are some things to consider when deciding how you want to pay your employees.

Withhold taxes correctly.

Don’t use paying in cash as a way to evade taxes. This practice could result in an unplanned tax liability along with a substantial penalty and interest charges. Even your employees could be hurt by this approach. If you pay cash and neglect to withhold taxes correctly, employees could be subject to federal and state individual tax penalties when they file their tax return. And if you aren’t withholding FICA taxes (Social Security and Medicare), they may be denied Social Security earnings that could have been used in calculating their potential Social Security benefits.

That’s why it’s crucial to make sure you’re handling taxes by the letter of the law. The IRS requires employers to withhold and deposit income and employment tax on all wages paid (including taxable tips). You are also required to report these deposits and the total wages, tips, and other compensation paid to to each employee. States have similar deposit and reporting requirements, in addition to state unemployment insurance taxes. So before you decide to pay your employees in cash, be sure to consult with a professional and review basic payroll laws.

Keep the right documentation.

Withholding taxes correctly keeps you compliant with federal and state employment and tax laws. And part of that is keeping the correct documentation about your employees’ pay. Records of things like when an employee received pay, how gross pay was computed, and how much pay was held for employee taxes is important for your own records. It’s also critical documentation to have on hand for any employee disputes about pay, or for a tax audit. If you’re paying cash, make sure that you’re meeting the pay-stub and record-keeping requirements mandated by your state.

Taxes can be tricky and should be handled with care. Whether you pay by cash, check, or direct deposit, Square Payroll has you covered. Review basic labor laws and consider whether getting a payroll service is right for you.



##### Frequently asked questions about paying employees in cash

When would you pay employees cash?

Sometimes hourly employees are paid additional income on top of their normal wages — like tips, commissions, or bonuses, for example. While this income may be paid out in cash, employees and employers must still declare the income on the pay stub and ensure the appropriate taxes are withheld and paid.

Do you need to pay tax on cash tips?

Employees who receive over $20 a month in cash tips are required to report the total amount of tips they received. Similar to traditional income, employees who earn cash tips must withhold Social Security, Medicare, and income taxes on both wages and reported tips each pay period. Employers are also obligated to pay the employer’s portion of these payroll taxes.

Are there any legitimate cash-paying jobs?

It’s common to pay employees cash in some fields more than others. Here are some jobs where it’s somewhat common to be paid in cash (while still paying and reporting taxes, of course):

  • Various types of self-employment, such as home repair, plumbing, cleaning services, or window cleaning

  • Contractual work

  • Farm or construction work

  • Transportation services like taxicabs and pedicabs

  • Seasonal workers for pop-up events and markets

  • Day laborers

  • Short-term family and teen employment

Technically speaking, it’s legal to pay employees in cash so long as you withhold payroll taxes correctly and keep thorough documentation of hours worked and wages earned by employees. Business owners who pay in cash must be scrupulous in their tax compliance and record keeping if they want to be compliant with payroll laws. Even with the best intentions, there’s the risk of payroll taxes being miscalculated, leaving you with heavy fines if you are audited.

Is there a penalty for paying employees under the table?

If you get audited and they discover that you misclassified workers, didn’t declare income, or underpaid taxes, you’ll be fully responsible for your employees’ taxes, penalties, and interest. Unfortunately, your workers suffer, too. Workers may not have access to disability or unemployment insurance if payroll records show that their wages were misreported. According to the California Employment Development Department’s website, “If your employees are injured on or off the job, they have the right to file a claim for Workers’ Compensation or SDI benefits. If your employees’ wages have not been reported, an investigation by the EDD may follow.”

Why should you avoid paying employees in cash?

Ultimately, paying your employees in cash can be risky. If your records of wages and tax payments are insufficient, your employees could claim that you failed to report their income correctly, for example, or that you falsely reported the number of hours they worked. Without a paper trail of hours worked and wages earned, you open yourself up to potential lawsuits. And without the pay stubs, timecards, and other proper paperwork necessary to defend your case, it’s unlikely that you’ll win in court. According to Jo Hyman, a Cleveland-based employment law attorney, such lawsuits can cost an employer between $75,000 and $125,000 to defend, or up to $250,000 if the case goes to trial.

Square Payroll makes paying hourly employees easy. It takes care of taxes, has fully integrated timecards, and comes with clear pricing and no hidden fees. Learn more about Square Payroll.


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