Business owners, at certain times, may want to pay their employees cash. We’ll get into the reasons why in a moment, but it’s important to recognize that cash still has a function and value. Yes, most business owners no long pay employees’ wages or salary in cash. It has departed as an everyday method of paying employees, but that doesn’t mean that people don’t still like to receive it!
Today we’ll review the ins and outs of paying in good old fashion greenbacks. If you want a broader discussion about payroll as a whole, check out our article on that topic.
Why Do People Like Cash Payments?
Cash payments remain the quickest way to conclude a transaction in many instances. Some switch in the brain flips when we receive an envelope of cash. There’s no getting around it, we simply like the feeling of receiving cash. In spite of the simplicity of digital transfers and paper checks that anyone can deposit on their phone, cash remains king.
Cash completely eliminates any work required by the receiving party. This is a little mental leap right here, but I always interpret cash payments as a symbolic thank you.
Cash has the connotation of being under the table, and outside the reach of taxation. Cash payments almost implicitly suggest that the recipient can decide whether or not to report the income. It’s inappropriate to omit this fact, even though we don’t recommend doing it. So, written perfectly clearly, we cannot stress this strongly enough: bad idea.
While we understand that people around the world routinely try to sidestep paying their taxes, it only takes one honest person to bring the power of an IRS audit down on your business. It’s just not a good idea, and it isn’t worth saving on your payroll taxes. The juice ain’t worth the squeeze!
Is It Legal to Pay Employees Cash?
Yes, it is absolutely legal to pay people in cash. Many people hold the misconception that cash payments violate employment or financial regulations. Laws only require all employers treat cash payments like regular payments, withholding deducted, issued paystubs (in most jurisdictions), and the like.
Paying the Proper Tax on Cash Payments
While the IRS views bonuses differently, they still treat it as a payment. Using cash instead of a check or direct deposit doesn’t absolve anyone of their tax responsibility. For employers, the government expects business owners to make proper deductions and pay them quarterly, just like regular payroll taxes.
With bonus payments most recipients must pay a 22% bonus tax along with normal FICA payroll taxes.
In Which Situations Would Cash Payments Make Sense?
Pay Independent Contractors Cash
Every business owner can tell you, stay in business long enough and situations will emerge where contractors request or prefer a cash payment. Similar to gas stations and restaurants that now charge a 2-3% surcharge for using a card, some contractors will offer different prices based on the payment method.
At other times, its simply more convenient to quickly hand over cash for good or services delivered. Owners of restaurants and those who frequently hire contractors know all about this. These business owners understand that sometimes it’s simply the simpler method. At other times, it is the only way the merchant accepts payment.
Pay Employees Annual Bonuses in Cash
Many employers like to show appreciation for their employees by paying them a bonus. The December holidays have become “the standard” time of year for bonuses, but this may shift depending on what kind of business is operating. Many businesses that have a seasonally-based business choose to pay bonuses to employees at the end of their busy period.
What Are the Downsides to Paying Employees Cash?
Too many cash payments can result in accounting & tax errors. When filling envelopes of cash, it becomes far easier to make a mistake. Business owners didn’t simply stop using cash on a whim, easier methods came along. These payments can also raise a red flag with the IRS and result in an audit.
Utilizing a payroll service, payroll software, or doing payroll yourself all share a common thread, they keep you more organized. As a payroll service, we absolutely believe that utilizing a experienced provider remains the most effective and profitable method overall. That said, we always encourage all business owners to make the choice that suits them best.
As mentioned in the section above, there can be miscommunications about the meaning of a cash payment. People can misinterpret cash as “I won’t report this, you shouldn’t either.” Again, we highly recommend politely and clearly letting all recipients know that you report all payments.
While we can’t force your hand and make you report all cash payments, we highly recommend you do. Further, we suggest you tell everyone you give cash to that you will appropriately and accurately report it. This allows you to meet your legal obligations while giving the other party the opportunity to roll the dice with the IRS if that’s what they want to do.