When you hear the term “payroll cash,” it might invoke images of a dimly lit back office where envelopes stuffed with dollar bills are passed around. And, people may think employers do this in an effort to avoid paying taxes. But the reality? Paying employees in cash can be completely above board, provided businesses follow Department of Labor and Internal Revenue Service (IRS) regulations. While it’s less common than direct deposit or checks, cash payroll is a legitimate option for businesses that handle it correctly.
In this guide, we walk you through how to set up cash payroll the right way, why some businesses prefer this payment method, and what you need to know to keep everything by the book and your cash-paid employees happy.
Maintain accurate payment records
All types of payroll processing require accurate records, and cash payments are no exception. Failing to keep accurate records could result in a company paying fewer taxes than required or not meeting certain legal compliances. This could mean fines or even jail time.
Additionally, because there aren’t any electronic records of a payment transfer, records of cash payments serve as proof of payment and can settle disputes. These details also keep the business on budget and assist with future financial planning.
Stick to a consistent payment schedule
A consistent payment schedule is good practice for businesses that pay in cash. Paying irregularly can cause payroll administrators to miscalculate payments, especially when employees work overtime.
Payments scheduled in regular weekly, biweekly, or monthly intervals make it easier for employees and employers to avoid confusion and maintain accurate payment records. This also helps employers reduce the risk of making mistakes when accounting for taxes and workers’ compensation requirements.
Calculate and remit applicable taxes
Employers that don’t withhold and remit the correct amount of payroll taxes can face serious legal consequences. Determining how much federal, state, and local taxes to withhold from a paycheck can be difficult to do on your own. It can be a good idea to use a paycheck calculator for guidance or compare payroll services and use one instead of crunching the numbers without help. Many vendors calculate and remit applicable taxes on an employer’s behalf.
Obtain payment confirmation from the employee
Getting confirmation from an employee is a necessary step in the payment process to guarantee that the employee received the cash. It will also prevent future issues. To do this, create a basic payment receipt that includes the employee’s information, payment period, payment date, and amount paid. When the employee receives the cash payment, have them sign the receipt as proof and keep it for your records.
Reasons employers might choose cash payments
Some employers may find it more advantageous to give their employees cash payments. Small companies that receive large amounts of cash from customers can cut down on bank trips by paying employees in cash. Newer companies may not have business bank accounts set up, making cash payments an easy option.
Employees may also prefer to receive cash payments. Cash payments provide immediate funds, evade potential bank fees, and offer flexible options for those who value financial privacy or don’t have bank accounts.
Potential risks to watch out for
Before deciding to pay your employees in cash, make sure that you know what you’re getting into. Some common risks include:
- Potential for errors: Paying cash wages makes you more prone to human error. Over time, small mistakes can lead to disputes with employees and the IRS.
- Concerns regarding inconsistent payments: Making payments in cash can seem more informal than direct deposit bank transfers. However, not keeping a regular payment schedule may lead to mistakes in calculating overtime pay.
- Risk of breaching pay stub regulations: While not mandatory in every state, some require employers to provide employees with pay stubs. Paying in cash increases the risk of breaching pay stub regulations.
- Withdrawing significant sums of money: Businesses that pay multiple employees in cash must withdraw large amounts from their bank accounts. This can lead to unwanted attention from the IRS.
- Challenges related to secure storage: Using cash means there’s more of a risk of money being lost or stolen before the payment is complete.
Cash vs. cashless payments: Which one to choose?
Choosing between payroll checks, direct deposit transfers, and cash payments will depend on what makes the most sense for your business and the preferences of your employees. Regardless of how you pay your employees, it is essential to ensure that your payments are reliable and accurate. Online payroll services can help make it easy to avoid errors and effectively track your payments. Our software accurately calculates federal, state, and local taxes, so you don’t have to worry about compliance issues.
If you are interested in learning more, we have a comprehensive resource on how to do payroll yourself that you may find helpful.
