If you're a new business owner, you're probably trying to save time and money wherever you can. Maybe you've thought about paying your employees in cash to simplify things, or perhaps you've heard other businesses doing it to "avoid taxes." While it might seem like a shortcut, paying cash under the table is not only illegal, it’s also going to cost you a lot more in the long run.
Let’s break down why paying employees cash instead of running payroll is a bad idea—and how it could actually increase your tax burden.
First things first: paying employees cash without running it through payroll violates federal and state labor laws. The IRS considers this tax evasion, and it’s a serious offense. Even if you're just trying to avoid payroll taxes or think it’s easier, failing to report wages properly can lead to hefty fines, penalties, and even criminal charges.
What could happen if you get caught?
You might think that paying cash keeps your tax bill lower, but that’s not really the case. Here’s why: when you pay employees off the books, you lose out on legitimate business deductions. Wages paid through payroll are deductible, which means that properly paying your employees can lower your taxable income.
What’s the difference?If you’re paying employees cash, those payments aren’t deductible because they’re not documented. This could leave you with a higher net income on your tax return—and a higher tax bill to match. For example, if you paid $50,000 in wages under the table, that $50,000 won’t reduce your taxable income, which could cost you thousands in extra taxes.
When you run payroll properly, both you and your employees are protected. Payroll taxes include contributions to Social Security, Medicare, and unemployment insurance. By paying cash under the table, you’re denying your employees these benefits, which could come back to haunt you.
Imagine an employee files for unemployment after leaving your company, or worse, they get hurt on the job. If they weren’t on the books, you could be held liable for unpaid payroll taxes and penalties on top of any compensation owed.
Paying employees cash might seem like it would fly under the radar, but it’s actually a red flag for the IRS. Even if you’re diligent about other parts of your tax return, discrepancies in payroll can draw attention, especially if you’re reporting very little or no payroll expenses while running a business that clearly requires employees.
And let’s be honest, payroll isn't just for your employees—it's for your business’s protection too. Handling payroll correctly can shield you from unnecessary audits and costly tax mistakes.
If you’ve been paying employees cash, it's not too late to correct course. Here are a few simple steps to get back on track:
Final Thoughts
Paying employees cash might seem like a quick fix, but it’s illegal and can result in far more taxes and fines than you’d ever save. Setting up a proper payroll system not only keeps you compliant, but it also protects your business and your employees. It's always better to play by the rules than to gamble with the future of your business.