Is it legal to pay employees cash under the table?
If an employee is paid cash under the table, their wages do not have tax withheld from them. Employers generally do not fill out the tax forms when they pay cash under the table, and they do not fill out W-2 forms with employee wages. When an employee is not recorded, they do not receive workers compensation or disability insurance, and they do not have the same benefits and rights.
It is illegal to pay employees cash under the table as you are not fulfilling your tax or insurance duties to them. You will not be in compliance with federal and state employment laws.
Is it illegal to pay employees cash?
It is perfectly legal to pay employees in cash, but it can cause more complications than other payment methods. For one, it is harder to have accurate records of wages paid. As discussed above, Labor Code section 226(a) requires that an employer provide to its employee an accurate wage statement. It is also more complicated to accurately calculate payroll taxes. If you do not pay the necessary payroll taxes, you could be in trouble with the IRS.
Downsides to paying employees in cash
Every business operates differently and has different needs. If paying cash is easier for you, then go ahead and pay your employees in cash. However, there are a few things you need to keep in mind:
- Safety risk – You may have to withdraw large amounts of cash for paying wages. It can be unsafe to carry or store that amount of money for a long period of time. There are increased risks of theft, or simply losing the money.
- Wage statements – Regardless of the payment method, all employers need to give their employees a wage statement. Penalties for not providing wage statements can be huge as they are calculated per employee and per pay period.
- Proof of payment – Employers are required to pay their employees on payday. Paying by check or direct debit has proof that the employee was paid on the correct day. If you choose to pay by cash, it is important to get employees to sign receipts to say they have received their payment.
- Payroll mistakes – While it is much easier to DIY your payroll, and there are no systems or accountants required, payroll mistakes can be costly. It is easy to miscalculate payroll taxes or forget to pay them at all. When using cash money, it is also more difficult to fix mistakes. Payroll mistakes, even honest mistakes, can attract fines, audits, or imprisonment. Ongoing payroll errors will mean you will be flagged to enforcement agencies.
- Consequences to employees – Your employees will not have a paper trail of their wages which will affect them in the long term. It will affect their credit score, finances, and their ability to rent or buy property.
- Lack of funding options – Without a payroll, loans and other funding can be challenging.