Paying employees via cash is a valid option, but it is not an efficient method and can be a headache to ensure it’s 100% legal. Since there are no records of cash payments, it’s important to ensure that your payroll reporting is accurate and concise. This includes providing detailed pay stubs, paying your employees on a fixed and regular schedule, and making all tax payments accurately and on time.
From keeping track of when payroll taxes need to be paid to keeping detailed records, an organized process is key when paying your team using cash. Here are some of the best practices you’ll want to follow to ensure you remain compliant.
1. Calculate & Withhold Payroll Taxes
Paying your employees in cash isn’t a pass you can use to avoid learning how to do payroll. You need to perform the basic steps all employers are responsible for.
Calculating Taxes & Deductions
As the employer, you will calculate and deduct all employee taxes. This includes Social Security (6.2%), Medicare (1.45%), and all applicable income taxes (federal, state, and local). In addition to taxes, you’ll be responsible for withholding any relevant deductions or garnishments. These are often very closely regulated by governing bodies and need to be calculated and deducted accurately and on time.
If you need help calculating FICA (Social Security and Medicare) taxes for your cash employees, use our free calculator below:
check out our guide.
You’re also responsible for paying some employer payroll taxes out of your business’s funds. You’ll need to track your calculations, from gross to net pay (and everything in between), to ensure that you get it right. You will be charged penalties if you send payments late or accidentally short the government.
Paying Payroll Taxes
Handling payroll taxes is usually one of the biggest issues employers deal with when trying to do their payroll using cash. The IRS and some state and local governments require you to withhold taxes from your employees’ paychecks, meaning you’ll need to deduct the amounts due and then send it to the proper agencies.
These government agencies typically don’t accept cash, so you’ll need a way to access at least some of your money electronically. This means that even if you choose to pay your employees with cash, you will need to have a way to make electronic tax payments.
Calculating and remitting payroll taxes can be one of the most complicated parts of paying employees using cash. What can make this process easier is using payroll software like Gusto. Its system allows you to run “manual check” payrolls, where it will do all of the calculations for you and provide you with just a net pay amount. While many employers pay that amount using a check, you can also choose to pay it with cash.
2. Track Work Hours
Assuming you have hourly workers, you’ll need an effective way to track employee work hours. This is important regardless of how you choose to pay your staff and is a huge component when paying with cash.
One reason tracking work hours is so important is due to labor laws that govern how long your employees can work before they need to be paid overtime. Federal law requires you to pay any hours worked over 40 in a workweek at time and a half—or 1.5x the employee’s regular rate. In addition to federal regulations, you’ll need to check your state overtime laws as many of them set their own regulations.
3. Pay Employees on a Regular Schedule
It’s best to establish a standard payroll process that includes which days or dates you will regularly pay your employees and follow it accordingly. Weekly, biweekly (every two weeks), and semimonthly (twice a month) are the most common pay periods.
Most states have minimum pay frequency requirements you have to follow to avoid being penalized. Monthly is usually the longest amount of time that most states will allow you to have in between payroll payments. However, in some states, like Virginia, Ohio, and California, semimonthly is the minimum requirement.
Our state payroll guides walk employers through everything they need to know—including minimum wage and overtime requirements—to run payroll within the respective state. Check out the specifics for your state below: