Some industries — such as janitorial services, takeout restaurants, beauty parlors, and dry cleaners — still work heavily with cash payments from customers. Employees within these industries are often paid in cash, but any business can feasibly pay employees in cash.
This is perfectly legal to do. You won’t magically summon the IRS to your storefront just because you are paying in old-fashioned legal tender instead of direct deposits. However, you have to make sure that you’re taking the necessary steps to protect your hard-earned business from potential legal ramifications down the road.
Paying in Cash vs. Paying Under the Table
The phrase “paying under the table,” refers to the practice of paying workers in cash without accounting for it in any way. There are no receipts or any other documentation to demonstrate that payment occurred.
That is dramatically different from making well-documented cash payments to employees, where full disclosure is present at every level. All aspects of the payment are recorded, including the amount of the payment and the recipient.
While some people feel that paying employees under the table can minimize the burden of taxes, it’s far more legally dangerous to skip over the proper recordkeeping and accounting practices.
Paying under the table potentially sets up a case for misclassifying employees as independent contractors. If you aren’t taking out taxes, you’re not sending in the proper amount required for FICA, something that employers must handle.
Pros and Cons of Paying Employees in Cash
The choice of whether to pay employees in cash or not certainly has its pros and cons.
For example, restaurant owners can use cash tips and bonuses to their benefit, helping encourage servers to push a certain product or helping raise the overall order average.
Record-keeping becomes essential when paying in cash. What if you paid an employee on Monday, but on Wednesday they say they didn’t get any money? It becomes their word against yours, and without a proper paper trail, could turn into legal trouble.
Minimizing Room for Error
There’s an opportunity for human error with cash payments. Accidents like underpaying or overpaying may occur more often.
Some employees won’t pay taxes on their cash wages. While most people want to ensure that they are paying their fair share, some will see what they can get away with evading if the opportunity presents itself.
How to Pay Employees in Cash Legally
If you’re going to pay employees in cash, there are steps to take to ensure that everything is legal, ethical, moral, and above board. Paying employees properly in cash is a matter of professionalism and maintaining your integrity as a business owner. Mishandled wages can lead to employee dissatisfaction, so it’s important to follow these guidelines carefully.
Maintain Your Financial Records
Maintaining good financial records isn’t just for cash payers; all companies should strive for thorough recordkeeping. The consequences of improper record-keeping are quite high. If you don’t have good records, you may run into an issue where you can’t pay employees.
Good record-keeping is the difference between being able to address the IRS with confidence and fearing the worst. With the proper records, an audit is simply an inconvenience. However, if those records aren’t in place, your business can face penalties and interest on those penalties.
Track Employee Hours
You must account for all employee hours, including overtime. Overtime is often where things get tricky. The Fair Labor Standards Act is very clear on overtime: non-exempt employees must be paid for time and a half if they work 40 hours in a workweek.
This means that you cannot force an employee to give up overtime pay; you have to properly account for all hours worked, including those hours over 40 in a workweek.
Tracking employee hours is essential to a well-run business, and this concept is the cornerstone of managing your business’s finances.
Don’t Forget to Withhold Taxes
Even if you decide to take the next step and pay employees in cash, you are still responsible for all applicable taxes. This means that you need to take care of federal and state taxes, as well as any other deductions laid out for your employees in terms of benefits. For example, if you’re paying insurance premiums, you still have to deduct those.
Of course, juggling cash payments also requires knowing not only what revenue to expect, but when to expect it. Some industries have a longer revenue cycle than others, but that doesn’t mean that you can’t pay employees on time while still waiting for invoices and payments.
Factoring is the perfect way to balance business needs and the needs of your employees. Simply put, factoring is the way to get money upfront based on future money that’s already set in place. So you can use your accounts receivable balance to ensure that you can cover overhead, including payroll.
Pay Employees on Time
It might be tempting to become less rigid when you offer cash payouts to your employees. However, you still have to ensure that you take care of your employees and pay their wages fairly.
Part of a fair wage is not just the amount, but the consistency of the frequency. Employees deserve to be paid exactly what they’re owed, and they must know when to expect payment.
Pay periods take care of these issues. Employees should know not only when they’re getting paid but what time period their payout reflects. This will let them accurately account for their money and check for any errors.
Create a Paper Trail
Paying cash is straightforward but still requires some documentation. You want to ensure that you have a paper trail for every single employee, every single payment, every single time.
Here’s how to make that work in real-time:
- Review hours worked: Before payday comes around, make sure that you review hours worked for every employee. Correct any errors and verify time records.
- Present a pay stub: Present a pay stub to the employee that documents hours worked, their hourly rate, and all taxes and deductions.
- Require a signature: Make room for the employee to sign a form documenting that they received their pay. Their signature will serve as proof of funds received, which can be important if additional issues arise in the future.
Ensuring you follow these three primary steps for documenting employee cash flow will help you avoid trouble with the law.
Be Mindful of the Law
Although there are plenty of reasons why a business may pay its employees in cash, it can get complicated when it comes to adhering to laws. If paying your employees in cash is the best course of action to move your business forward, be sure to research your local, state, and federal laws regarding employee payment.
Ensure that you are looking at all of these aspects carefully before moving forward with paying employees in cash.