‘Can I Pay Employees With Cash?’
One of the largest misconceptions around payroll is whether or not you can pay employees with cash.
You can legally pay employees with cash, and it’s quite common in industries like construction and food service.
Although it’s legal, paying employees with cash “under the table”—without proper recordkeeping, taxes, and benefits—is illegal.
That’s why we always recommend a modern setup with physical paychecks or direct deposits, as the administrative burden shrinks significantly.
Continue reading to learn more.
3 Common Myths About Paying Employees With Cash
Paying employees with cash is a slippery slope, and it can lead to long-term legal consequences that could bankrupt your company.
Some of the most common myths and misconceptions we hear from business owners:
1. “I’m just going to pay with cash until I decide I want to hire them.”
We occasionally hear from business owners who prefer to test out workers before formally offering a position.
That’s technically OK, but there are deeper issues at play:
If someone isn’t an employee, they’re an independent contractor.
As an independent contractor, a few best practices should be followed so you don’t violate worker rights (especially if you’re ever audited):
- Ask the contractor for a completed W-9.
- Plan to complete and issue a 1099 at the end of the year, especially if you pay them more than $2,000.
- Follow the IRS and DOL standards for maintaining appropriate relationships with your independent contractor. For example, contractors are allowed to set their own schedule, negotiate their own rates, and work for your competitors.
To learn more about W-2 employees and 1099 workers, download our employee vs. independent contractor checklist.
2. “I’m just going to use Venmo or Cash App to make things easier.”
It’s true that payment tools like Venmo or Cash App can help you make quick payments to workers, but there are countless potential issues that could damage your company’s reputation and financial health.
For example:
- These apps don’t manage taxes. If you pay through one of these apps, you’re still responsible for covering Social Security, taxes, and benefits, which may create additional work and responsibilities for you.
- These apps don’t offer the same protections as a bank. Major money transfer apps lack traditional federal deposit insurance, offer limited fraud protection, and occasionally have hidden fees.
- You’re creating a digital trail. If you’re ever audited, your transaction history creates a digital trail for the audit to examine—which is especially useful when checking how you’ve managed taxes and benefits in the past.
3. “Paying them in cash just this once is fine.”
Paying with cash is often tempting, especially for the first paycheck or when funds in the company bank account are low, but it could lead to significant issues.
Some of the major issues include:
- You’re still responsible for tracking the paycheck on the W-2, and paying outside of your typical payroll software makes this harder.
- You’re still responsible for tracking and reporting taxes on the cash. Again, making any sort of employee payment outside of your payroll software only becomes more difficult without your traditional software.
- You’re still responsible for the benefits. This can make things even more complicated. For example, if your employee is owed a 401(k) contribution or is supposed to pay for part of their health insurance, you need to make that calculation before giving cash.
- You’re still responsible for paying overtime and minimum wage. Paying with cash doesn’t get you off the hook with federal and state laws surrounding overtime and minimum wage.
So, while paying with cash is technically fine, it can actually create a larger administrative burden.
Reasons You Should Avoid Paying With Cash
Now that we’ve covered some of the biggest myths and misconceptions about paying with cash, let’s identify some of the biggest reasons not to pay with cash:
- Theft – Holding large amounts of cash exposes you and your employees to a higher risk of theft and violence.
- Recordkeeping – Paying even one employee with cash is a recordkeeping hassle, especially when you factor in:
- Taxes
- Benefits
- Social Security
When you do that with multiple employees, it only gets more difficult.
- Automation – When you pay with cash, you can’t set up any of the benefits of working with an outside payroll provider or even simple direct deposit.
Use The Payroll Shoppe
Don’t risk the safety and longevity of your business by insisting on cash payments.
Switch to The Payroll Shoppe. Our customer service-focused philosophy means you’ll receive hands-on assistance from a dedicated payroll specialist.
Contact us to get started, or read our blogs for additional payroll tips, recommendations, and best practices.