Will I get into trouble with the Internal Revenue Service if I pay my employees in cash?

Choosing to pay employees in cash rather than with a check is not entirely unusual. Many small business owners opt to go this route because it can be easier and less expensive. Certain industries in particular may have a tendency to lean this way. For example, a small landscaping company that services homes around Tulsa may find it easier to pay laborers with cash on hand at the end of the day. While there is nothing illegal about paying employees in cash, employers must remember that paying cash is not a legal way of avoiding payroll tax obligations.

Employers Must Pay Payroll Taxes

While many businesses that pay their employees in cash do so the proper way and pay their employment taxes as required by law, others use this method to evade their payroll tax obligations. Attempting to do this will result in tax debt and potential penalties imposed by the IRS. The IRS will build a case against you using all of the available information that it can find. This is true regardless of whether there are payroll records to review or checks to analyze.

Employers paying their employees in cash are still required to do all of the following:

  • Withhold payroll taxes from employee pay
  • Report and pay the employee and employer portion of Federal Insurance Contributions Act (FICA) tax to the IRS
  • Pay additional taxes, such as federal and state unemployment tax
  • Report employee income annually on IRS Form W-2
  • Verify work eligibility before hiring and paying employees using Form I-9 or the E-Verify system

Are you interested in learning more about the many types of tax problems that businesses owners can run into? If so, we encourage you to tune in to the Travis Watkins Radio show, airing at 1:00 and 4:00 p.m. on Sunday afternoons.


Travis Watkins
Senior Tax Attorney