If you’re beginning a new firm or trying to help your workers during a tough period, your first thought could be to compensate them in cash.
While money is power, it isn’t the best approach for paying employees. Payroll mistakes can lead to severe consequences from a number of enforcement authorities, such as the IRS and the Department of Labor, despite the fact that it is the quickest and simplest way to deliver payment to workers.
Is Paying Employees with Cash Illegal?
Although it is not unlawful to pay somebody in cash, there are a number of disadvantages to doing so. It may make paying the appropriate quantity of payroll taxes more difficult. When employers give workers cash and do not subtract the applicable payroll taxes, the term “under the table” is being used. Cash wages must be handled the same as other wages, which means that if you don’t deduct payroll taxes, you risk getting into trouble with the IRS.
What are the Potential Drawbacks of paying employees in cash?
Each small business is run in a unique way. As a result, you can pay staff in cash if you want to, but there are a few factors to take into account.
Danger to one’s safety You can find yourself making huge withdrawals based on how many staff you have. Carrying significant sums of money for a lengthy period of time can be risky owing to the possibility of theft or actually dropping out of your pocket without your knowledge.
- Wage declarations In many jurisdictions, matter what form of payment, wage statements are needed. Even though they can be supplied if an employer pays for them in advance, they are frequently overlooked. Penalties for not giving are usually assessed by worker and per pay period, and can result in significant fines.
- Payment receipt. In several areas, payment on payday is also compulsory. Because checks carry a date, they can show that payroll was delivered on payday. Employers who pay workers in cash may want to obtain notarized receipts from them stating that they cashed the check.
- Payroll errors are easier to make. It can be simple to do your own payroll, but if you’re utilizing cash, it can be more complicated. Essential payroll taxes are frequently overestimated or not paid at all, and mistakes are more difficult to correct while using paper money.
- Penalties are a possibility. Continuing on from the previous point, recurrent payroll errors might be a red flag for law enforcement. Even if you make a genuine error, you could face penalties varying from penalties to audits to, in the worst-case scenario, incarceration.
- Workers will suffer as a result. While your employee may be ecstatic to receive the money in the short term, the absence of an official paper chain may have a detrimental influence on them in the long run.
- Not enough funds. It can be difficult to receive loans and other forms of capital if you don’t have a professional payroll system in place.
How to Pay Employees in Cash the Right Way
If you still need to go forward with cash wages despite knowing the risks, there are several steps you can take to guarantee you stay compliant.
- Recognize the needs for payroll taxes. Due to the obvious various tax obligations that exists, payroll can be a difficult undertaking. FICA taxes, jobless, and federal and/or state income taxes are all your responsibility (according to where you live). Make sure you’re deducting and sending the right amount of payroll taxes when delivering cash payments.
- Recognize the needs for pay and hours worked. These factors influence how much employees must be compensated and how much time counts as compensatory time.
- Maintain accurate records. Keeping track of your records is a good business sense in general, but it becomes even more important when paying cash. You must rely on precise records because cash does not have the same paper record as bank transfer or a check. Keep track of how much you paid in salaries, how much you deducted in payroll taxes, and when you compensated your worker. If you have a robust system in place, you will be protected if you have any issues with a law enforcement agency.
