While it is perfectly acceptable to pay employees in cash, it has become less common due to the ease of electronic transactions. Furthermore, there are various challenges associated with the practice, particularly from the standpoint of payroll taxes.
Things To Consider When Paying In Cash
Before paying your employees in cash it is a good idea to speak with an accountant. They can offer you advice on how to do it correctly, as well as how to avoid running into problems with the Internal Revenue Service. The wages for all employees must be reported, including cash, and failure to do so could lead to penalties.
It is also essential to maintain accurate records. This can be tough to do when paying in cash, as in addition to recording how much you’ve paid you must also make a note of the date the cash was issued. This will protect you in the event that you’re audited.
Advantages Of Paying In Cash
Cash transactions are most beneficial to the recipient, but are also advantageous to the person making payment since it can often lead to discounts. It isn’t unusual for merchants and independent contractors who perform hands on labor to prefer cash over a credit card or check. However, cash transactions should still be reported as income, and in fact, the IRS has special cash reporting, which is located in Form 8300 for Reporting Cash Payments of Over $10,000.
Unemployment And Worker’s Compensation
One reason why accurate record keeping is so important is because of potential worker’s compensation or unemployment claims made by employees. If your records aren’t accurate, such claims could trigger an audit. Additionally as the employer you’d also be failing to adhere to unemployment regulations. It is for this reason that you must exercise caution when paying cash and employers are also expected to pay unemployment tax.
Those who fail to pay employment tax will find that there isn’t much defense against tax charges. In this case the IRS will require restitution and in the most serious instances employers could be sent to jail for as long as 5 years. Employers are also expected to withhold the income taxes for employee wages which is dependent on the amount of allowances that employees claim on their W-4 Form. Additional taxes that must be withheld by employers include FICA, and there are employment tax forms that must be completed annually and quarterly.
As you can see, this makes paying in cash a very challenging proposition. It becomes even harder as the company increases in size. While a small business may be able to get away with paying a handful of employees in cash, performing the same feat with hundreds or thousands of employees is simply not feasible. When you consider the risks that are involved it is much wiser to simply pay through direct deposit or check, which can be implemented with a payroll system. This system will provide automatic reports while paying your payroll taxes and filing them. It is the best way to avoid the complications associated with paying in cash.