Is it Legal to Pay Employees in Cash?

When you pass “GO” in Monopoly, you receive $200 in “monopoly money” cash. Easy. Simple. Done. That may be all well and good for a board game, but does it work in a business setting? Is paying employees in cash the easiest payment method? Is it legal to pay employees in cash?

Is it legal to pay employees in cash?

Paying employees in cash is perfectly legal if you comply with employment laws. You have to take out the normal payroll deductions. Types of payroll deductions include income taxes (federal, state, and local), FICA taxes (FICA tax includes Social Security and Medicare taxes), health insurance, and anything else withheld from an employee’s earnings.

States also enforce their own rules for paying employees. Refer to the U.S. Department of Labor for specific rules on paying with cash in your state.

Paying employees cash under the table

Paying employees cash under the table means that the employer does not report their employees or take deductions out of paychecks. Paying employees cash under the table is illegal, and can cost you heavy fines and/or prison time.

The Internal Revenue Service (IRS) lists paying employees cash under the table as one of the top ways employers avoid paying taxes. However, the IRS states that there is nothing illegal about paying employees cash in hand as long as you take out the appropriate deductions. Treat cash payments the same way you would direct deposit services or paychecks by taking out deductions.

The dangers of paying employees in cash

If you decide to pay your employees in cash, you could be at risk. Take a look at what you might face by paying employees in cash.

Stéphanie McGuirt, Bookkeeper and Advisor, says, “Paying employees in cash adds a deep layer of complexity to managing payroll. You must be prepared to deduct the proper amount of payroll taxes as well as keep excellent records in case of an audit.”

Lack of records

Maintaining clear records gets tricky when you pay with cash. When you pay an employee with direct deposit or a check, your bank statement gives you a record of employee payments. You will not have an automatic record verifying the amount of money your employee received if you pay in cash. If your employee later says they did not receive the correct pay, you will have nothing to reference.

To avoid a lack of payment records, provide a pay stub to your employees as proof of payment, and ask them to sign it before giving them their cash payments. Pay stub information should show total gross wages (pay before deductions), deductions, and net pay (take-home pay). Be sure to make a copy of the signed pay stub and keep it for your records.

Not having records is also extremely harmful to your business if you are audited. Your tax return will need to equal your overall financial records, including your payroll expenses.

Forgetting to take out deductions

Before giving your employees their cash payments, you need to take out deductions. Not doing so will cost you more later on. Be consistent and keep track of which deductions you need to withhold. Again, you will need to have accurate financial statements.

Report wages paid and tax deductions to the IRS when tax season comes around. If you do not take out the proper deductions, you will need to pay the difference.

Other payment options

Employers have a few options besides paying in cash when it comes to paying employees. They can write checks, use direct deposit, or give employees payroll cards. Direct deposit is now the most common payment method, but can employers make direct deposit mandatory? There are federal and state laws in place allowing employers to make direct deposit mandatory.

For a more secure, organized, and effective payment method, avoid paying your employees with cash, as it can become a hassle later on. If you do pay employees in cash, be sure to maintain accurate records and take out the correct deductions to protect yourself and your small business.

Use Patriot’s online payroll software to keep clear records and pay your employees hassle-free. Let Patriot’s Full-Service Payroll deposit and file your federal, state, and local taxes so you don’t have to. Try it for free today!

This article has been updated from its original publication date of October 24, 2016.