No, it is not generally against the law to pay employees cash, but cash wages must still be properly recorded, reported, and taxed.
The legality of cash payments depends on whether the employer follows all applicable federal, state, and local payroll, wage, and tax requirements. Paying workers in cash does not eliminate an employer’s responsibilities regarding minimum wage, overtime, tax withholding, or payroll records.
Businesses considering paying employees cash should therefore understand that the payment method itself is not the problem; failing to document and report the wages is what can create legal trouble.
When Paying Employees Cash Is Legal
An employer may generally pay an employee with physical currency rather than a direct deposit, paper check, or another payment method. The Internal Revenue Service recognizes that wages may be paid in cash or other forms, and cash compensation is generally still treated as wages for employment tax purposes.
For example, a small business owner might pay an employee $800 in cash for work performed during a pay period. That payment can be lawful if the employer properly calculates the employee’s wages, withholds required taxes when applicable, keeps accurate records, and reports the compensation to the appropriate government agencies.
In other words, cash payments should go through the same general payroll process as any other form of compensation. Paying an employee in cash “off the books” is very different from making a properly documented cash payroll payment.
The Importance of Payroll Records
One of the biggest risks associated with cash payments is poor documentation. Electronic transfers and checks naturally create a payment trail, while physical cash can be more difficult to track. Employers should maintain accurate records showing the employee’s hours worked, rate of pay, gross wages, deductions, taxes withheld, net amount paid, and the date of payment.
A written receipt signed by the employee can also help document that the payment was made. Employers should keep these records as part of their normal payroll system rather than treating cash payments as informal transactions.
Proper documentation can help protect both the employer and employee if questions arise about unpaid wages, overtime, or tax reporting.
Taxes Still Apply to Cash Wages
Cash wages do not automatically become tax-free wages. Employers generally remain responsible for withholding and paying applicable federal payroll taxes and reporting employee wages. The IRS states that wages subject to federal employment taxes can include pay given in cash, and employers generally use Form W-2 to report wages and other compensation paid to employees.
Employers may also have obligations involving Social Security, Medicare, unemployment taxes, and state or local payroll requirements. If taxes are not properly handled, an employer could face back taxes, interest, and penalties.
The employee may also have income-reporting obligations. Receiving wages in cash does not change the basic rule that taxable income generally must be reported.
Cash Payments and Wage Laws
Employers must still comply with wage and hour laws regardless of how employees are paid. Under 29 U.S.C. § 207, covered non-exempt employees generally must receive overtime pay at a rate of at least one and one-half times their regular rate for hours worked beyond 40 in a workweek.
Therefore, an employer cannot avoid overtime obligations simply by paying a worker in cash. Likewise, paying cash does not permit an employer to pay below the applicable minimum wage or ignore legally required wage protections.
State laws may create additional requirements concerning pay statements, recordkeeping, payment schedules, and acceptable payment methods. Employers should review the rules that apply where their employees work.
What Does “Under the Table” Mean?
The phrase “under the table” usually refers to paying wages without properly recording or reporting them. This practice can create serious legal problems because it may involve tax violations, wage violations, or failures to comply with employment recordkeeping requirements.
For example, an employer may give a worker cash but intentionally fail to record the payment, withhold required taxes, or report the wages. In that situation, the legal issue is not simply that cash was used. The problem is the failure to meet the employer’s legal obligations.
Employees can also face problems when cash income is hidden because it may affect their tax filings and their ability to prove their income for loans, housing, or other purposes.
Key Takeaways
- Paying employees cash is generally legal when the wages are properly recorded and reported.
- Cash payments do not remove payroll tax, minimum wage, or overtime obligations.
- Employers should maintain detailed payroll records and payment documentation.
- “Under the table” payments can create significant legal and tax problems.
- State and local laws may impose additional requirements beyond federal rules.
- Employers should seek professional legal or tax guidance when they are unsure how to handle cash payroll.
