Payroll and Taxes

Is it Legal in My State to Pay Employees in Cash?

Cortez Ratke
January 22, 2024
min read

Paying employees in cash has been a traditional method, but is it really legal nowadays? While paying employees in cash might seem like the quickest and simplest method for distributing payment, it's far from the optimal choice for payroll. Payroll errors can result in penalties from various enforcement agencies, including but not limited to the IRS and DOL.

In this article, we'll delve into the legality of paying employees in cash, exploring the potential risks, compliance with labor laws, and alternative solutions for modern payroll practices.

Is it Legal to Pay Employees in Cash?

The legality of paying employees in cash depends on compliance with employment laws. It is perfectly legal as long as standard payroll deductions are adhered to. These deductions encompass various elements such as income taxes (federal, state, and local), FICA tax (comprising Social Security and Medicare taxes), health insurance premiums, and any other withholdings from an employee's earnings.

It's important to note that states may have additional regulations regarding cash payments to employees. For precise guidelines applicable to your state, it is advisable to refer to the U.S. Department of Labor, which outlines specific rules and regulations regarding the use of cash in compensating employees.

Paying employees in cash without the required tax deductions is illegal and can result in significant penalties, including hefty fines and prison time.

Potential Risks of Paying Employees in Cash

Choosing to compensate your employees in cash introduces a set of risks that can have significant consequences. Here's a list of the potential challenges you might encounter by opting for cash payments:

  1. Lack of records
  2. Inaccurate payroll calculations
  3. Compliance issues

Lack of records

When paying employees with cash, maintaining clear records becomes a challenging task. Unlike transactions through direct deposit or checks, cash payments lack an automatic trail, making it difficult to verify the exact amount received by the employee. 

In the absence of a tangible record, disputes may arise, especially if an employee claims they did not receive the correct pay. 

To mitigate this risk, provide employees with a pay stub detailing gross wages, deductions, and net pay before issuing cash payments. Have them sign the pay stub as proof of payment, keeping a copy for your records. Record-keeping is crucial, particularly during audits to ensure that your financial statements align with your tax returns.

You can create the pay stub with the help of simple and user-friendly, tools such as The latter will help you to save your precious time and will provide pay stubs in minutes!

Inaccurate payroll calculations

Paying employees in cash adds complexity to payroll management, requiring attention to accurate calculations. Failure to deduct the appropriate amounts before cash payments can lead to complications later on. Consistency is key, so keep track of necessary deductions and ensure that your financial statements accurately reflect these transactions. Come tax season, reporting wages paid and tax deductions to the IRS is essential for compliance. 

As an alternative to navigating these risks, consider using more efficient and compliant payroll solutions, such as With accurate payroll calculations, support, and a simple 5-step payroll process, it could be the perfect solution for your payroll responsibilities.

Compliance issues

Cash payments can create complexities in tax reporting and withholding. Employers must adhere to tax regulations and provide employees with accurate W-2 forms at the end of the tax year. Failure to comply may lead to penalties and legal consequences.

Bottom line

While paying employees in cash may have been a traditional practice, it poses legal and operational challenges. Adherence to employment laws, accurate payroll calculations, and compliance with tax regulations are essential when considering cash payments.

To overcome these challenges, you can explore alternative payment methods and payroll solutions. Using tools like can simplify the payroll process, ensuring accurate calculations and mitigating potential risks associated with cash payments.

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