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Although paying workers with cash is legal, it is not the most effective method of doing so. Because cash payments aren’t recorded, it’s critical that your payroll reporting is precise and simple.
This involves producing precise stubs of pay, paying your workers on a set and consistent timetable, and correctly and timely filing all tax returns.
When paying your staff with cash, an orderly approach is essential, from keeping track of when payroll taxes must be paid to maintaining accurate records. Here are some recommended practices to follow to guarantee that you stay in compliance:
1. Calculate & Withhold Payroll Taxes & Deductions Correctly
You can’t get away with not understanding how to perform payroll by paying your staff in cash. You must follow the fundamental procedures that all employers must follow.
Calculating Deductions and Taxes
You will be responsible for calculating and deducting all employee taxes as the employer. This includes 6.2 percent for Social Security, 1.45 percent for Medicare, and any applicable income taxes (federal, state, and local). You’ll be responsible for withholding any appropriate deductions or garnishments in addition to taxes. Governing authorities often control these, and they must be computed and subtracted precisely and in a timely way.
You’re also in charge of paying certain employer payroll taxes from your company’s cash. To be sure you do it properly, keep track of your calculations from gross to net pay (and everything in between). If you make payments late or mistakenly underpay the government, you may be penalized.
Taking Care of Payroll Taxes
When attempting to conduct payroll with cash, the most common difficulty that firms face is payroll taxes. The Internal Revenue Service (IRS) and certain state and local governments need you to withhold taxes from your workers’ paychecks, which means you’ll have to deduct the required amounts and submit them to the appropriate authorities.
Because many government organizations seldom take cash, you’ll need to be able to access at least part of your funds online. This implies that you’ll need a mechanism to make electronic tax payments even if you want to pay your staff in cash.
One of the most difficult aspects of paying workers in cash is calculating and remitting payroll taxes. Using payroll software like Gusto may help make this process go more smoothly. Its system enables you to execute “manual check” payrolls, in which it performs all of the computations for you and just shows you the net pay amount. While many businesses pay the amount by cheque, you have the option of paying it in cash.
2. Keep meticulous records of your working hours.
If you have hourly employees, you’ll need a good means to keep track of their working hours. This is critical regardless of how you choose to pay your employees, but it is more crucial when paying with cash. Because of labor rules that control how long your workers may work before they must be paid overtime, this is critical.
Any hours worked beyond 40 in a workweek must be paid at time and a half, or 1.5 times the employee’s usual rate, according to federal law. In addition to federal requirements, you should review your state’s overtime legislation, since many of them have their own.
3. Pay Employees on a Consistent Basis
Paying staff in cash may offer you the illusion of flexibility, but don’t fall for it. It’s important to create a consistent payroll method that outlines which days or dates you’ll pay your workers on a regular basis and stick to it.
The most frequent pay intervals are weekly, bi-monthly (every two weeks), and semimonthly (twice a month). To avoid being punished, most states have minimum pay frequency rules that must be followed. Most states allow you to go up to a year between payroll payments if you pay on a monthly basis. Semimonthly is the minimal requirement in several states, such as Virginia, Ohio, and California.
4. Create a Payroll-Specific Bank Account
We previously covered the importance of being able to electronically transfer funds to pay for expenditures such as payroll taxes. To take things a step further, we propose creating a separate bank account for payroll transactions. Keep payroll monies separate even if you have a normal company checking account; keeping them separate makes them simpler to monitor and record for audit reasons (you’re more likely to be audited if you pay workers cash).
Here are some guidelines to follow when it comes to your payroll bank account:
- Make sure the transaction list isn’t clogged up with unneeded deductions and withdrawals. If you pay staff every two weeks, make a commitment to withdrawing all cash needed for distribution at once each pay period. When feasible, pay your taxes, deductions, and other payroll expenditures on the same dates each month.
- There are no exceptions to doing payroll transactions via this account.
- Maintain a consistent deposit schedule. This will make sifting through transactions simpler, and it will be easier to demonstrate to auditors where your money comes from.
5. Request that employees sign a document stating that they have received their paychecks
An approval system that you can use to certify that workers got their pay is a vital procedure to develop. Cash payments have no intrinsic paper record, and some individuals are dishonest; it’s not uncommon for an employee to claim that they never got their salary.
To avoid the risk of fraud or misunderstanding, we propose developing a basic spreadsheet that contains the following information for each pay period:
- Pay date
- Employees are paid for the pay period in which they work.
- The names of each employee are listed below.
- The amount they are compensated
- A distinctive spot is included.
For even greater openness, you could include your firm logo, or at the very least the name. This eliminates any doubt about what was paid and when it was paid.
6. Create an Arsenal of Payroll Records & Store Them
Employers that pay their employees in cash do it for a variety of reasons; if avoiding paperwork and bureaucracy is one of them, you should rethink. You won’t have to deal with checks or payroll software (which, by the way, makes things easier), but you will need to keep adequate records that show how much money you’re paying out, who you’re paying, what job you’re paying for, and so on.
Because you’ll be handling payroll on your own, you’ll have to create several of this paperwork yourself, including:
- stubs of pay
- Records from the bank (statements and transaction reports)
- Records of accounting
- Documents for hiring (I-9, W-4 Forms, and offer letters)
- Cards for keeping track of time
7. Keep track of how much your pay is.
When you start paying out more than $5,000 per week, you should think about alternate options for compensating your personnel. You’ll be putting yourself in danger if you carry that much cash about since you’re more likely to be robbed or lose the money.
Also, avoid making several cash withdrawals totaling more than $10,000 at a time. The bank is compelled by law to record those sums in cash withdrawals to the IRS. Even if your payroll procedure is legal, this will raise red lights, and you’ll almost certainly face an audit after a few reports.
8. Comply with Payroll Laws
We’ve covered a few rules in this post, such as minimum wage and overtime, but we recommend that you get aware of other payroll laws as well to avoid any payroll compliance difficulties.
Determine if you must acquire workers’ compensation for your employees (you most likely must) and how you will pay it out (this will come out of your business funds, not employee paychecks). And, if your staff earn tips, you’ll need to set up a method for distributing (and paying out) the money. You’ll also need to know about tip reporting and tipped minimum wage (a reduced minimum wage you may pay if workers receive enough tips).
Employees Paid Under the Table
While paying your workers in cash is completely legal, paying them under the table is illegal and could land you in jail. Under the table pay is untaxed cash employers issue to workers to avoid having to withhold and pay taxes. Employers who engage in Employees Paid Under the Table do so to avoid creating any kind of paper trail that would set off red flags with the IRS.
Why Paying Under the Table Isn’t a Long-Term Solution
If you (or someone you know) still needs persuasion that paying under the table is a terrible idea, consider the following reasons why it won’t work in the long run, particularly if you want to run a successful business:
- When you pay in cash, you open yourself up to additional scrutiny and the possibility of an audit. IRS audits are quite thorough, and trying to conceal transactions from them may lead to even more serious consequences.
- As your company and income increase, it gets more difficult to conceal employees. No company owner wants to be in a position where they are just breaking even or losing money.
- If an employee’s compensation isn’t legitimate, they won’t be eligible for future Social Security or Medicare payments. You’re more likely to be exposed if they start to feel deceived.
Paying Employees Cash Under the Table: Penalties
If you’re thinking you can ride out the risk of Employees Paid Under the Table until you’re caught and just pay a little cash to get out of it, think again. The consequences can be steep:
- You will, of course, pay back taxes.
- You’ll also owe interest and penalties, which increase exponentially the farther back the IRS can track your illegal pay.
- Worse, you may lose your company. You will become bankrupt if your spending is too high.
- Even worse than losing your company, you might face tax evasion charges, which could result in a five-year jail sentence.
Conclusion
It is perfectly lawful to pay workers their paychecks in cash. However, it is not the most effective method of payroll distribution, and it will not replace the necessity for a well-organized payroll process, sufficient paperwork, or a bank account. Before you start, spend some time learning how to perform payroll and learning the ins and outs of the regulations that regulate it. Finally, remember that understanding how to lawfully pay workers in cash will not only save you time and money but will also keep you out of jail and out of business.
