Cash pay is wages handed to an employee in physical currency instead of by direct deposit or check, and under federal tax law it carries exactly the same obligations as any other form of compensation. The employer must withhold income tax and FICA, deposit those amounts with the IRS, and issue a W-2. The employee reports the wages on their tax return. The money’s physical form changes nothing about the tax rules; what changes everything is whether those steps actually get done.
Legal Cash Wages Versus Under-the-Table Pay
Federal law defines wages as all compensation for services performed, regardless of the payment method.1Office of the Law Revision Counsel. 26 U.S. Code 3401 – Definitions Paying an employee in cash through a proper payroll system, with taxes withheld and a W-2 issued, is entirely legal.
“Under the table” describes something different: cash handed over with no withholding and no reporting. That arrangement violates federal tax law even when both the employer and employee agree to it. The employer owes the unpaid taxes plus penalties. The employee still owes income tax on the money and can face penalties for leaving it off a return. The line between legitimate cash payroll and under-the-table work is not the currency, it is whether the taxes are handled.
If You Are Paid in Cash
When your employer runs cash payroll correctly, your tax filing looks like anyone else’s. The gross wages and the federal income tax, Social Security, and Medicare amounts on your W-2 flow straight onto your Form 1040. Compare the W-2 against your own record of what you received and what was withheld each pay period, because the IRS matches W-2 data to your return electronically and any mismatch can trigger a notice.
What to Do When No W-2 Arrives
If January 31 passes without a W-2, or your employer refuses to produce one, you still owe tax on the income. Contact the IRS, which can send a formal request to the employer. You can then file your return using Form 4852, a substitute wage statement, estimating your wages and any withholding from pay stubs, bank deposits, or your own records and explaining why the W-2 is missing.2Internal Revenue Service. Using Form 4852 When Missing the Form W-2 or 1099-R
If you believe you have been classified as an independent contractor when you should be an employee, you can ask the IRS to decide by filing Form SS-8.3Internal Revenue Service. About Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding Whatever your employer does or does not report, all cash income must appear on your return.
Cash Tips
If you earn $20 or more in cash tips in a calendar month, you are required to report that total to your employer so income tax and FICA can be withheld. Tips you did not report to your employer still have to be reported on your tax return using Form 4137, which calculates the Social Security and Medicare tax you owe on them. Failing to report tips to your employer when required can trigger a penalty equal to 50% of the Social Security and Medicare tax on the unreported amount.
If You Pay Employees in Cash
Running cash payroll means doing everything an ordinary employer does, with an added recordkeeping burden because no bank record proves the payment happened.
Withholding
Start with the employee’s Form W-4 to determine federal income tax withholding.4Internal Revenue Service. Topic No. 753, Form W-4, Employees Withholding Certificate On top of that, withhold the employee’s share of FICA and pay the matching employer share. FICA has two components:
- Social Security: 6.2% from the employee and 6.2% from the employer, applied to wages up to $184,500 in 2026.5Social Security Administration. Contribution and Benefit Base
- Medicare: 1.45% from each side, with no wage cap.6Internal Revenue Service. Topic No. 751 – Social Security and Medicare Withholding Rates
Combined, FICA is 15.3% of wages up to the Social Security cap, split evenly at 7.65% each. Once an employee’s wages pass $200,000 in a calendar year, you must withhold an additional 0.9% Medicare tax from the excess; there is no employer match on that extra amount.7Internal Revenue Service. Topic No. 560, Additional Medicare Tax State and local withholding may also apply depending on where the employee works.
Depositing and Reporting
Withheld taxes and the employer’s FICA share go to the IRS through the Electronic Federal Tax Payment System, a free service run by the Treasury.8Internal Revenue Service. EFTPS: The Electronic Federal Tax Payment System Each quarter, aggregate wages and taxes get reported on Form 941.9Internal Revenue Service. About Form 941, Employers Quarterly Federal Tax Return By January 31 of the following year, each employee must receive a W-2 showing total cash wages and every tax withheld.10Social Security Administration. Deadline Dates to File W-2s
Receipts and Pay Statements
With cash there is no bank record, so the employer has to build a paper trail. Best practice is a signed, dated receipt from the employee each pay period confirming the net cash amount received. Without that signature, the IRS can disallow the wage deduction entirely during an audit. Pair the receipt with an itemized pay statement showing gross wages, each deduction, and the net amount. Federal law under the FLSA requires accurate records of hours worked and wages paid but does not actually mandate pay stubs; most states have their own stub rules with their own penalties.11U.S. Department of Labor. Fair Labor Standards Act Advisor – Are Pay Stubs Required Keep employment tax records for at least four years after the tax is due or paid, whichever is later.12Internal Revenue Service. How Long Should I Keep Records
Penalties That Follow the Owner Personally
Missing a deposit deadline draws a tiered penalty: 2% for deposits 1 to 5 days late, 5% for 6 to 15 days, 10% beyond 15 days, and 15% if the deposit is still unpaid more than 10 days after an IRS notice.13Internal Revenue Service. Failure to Deposit Penalty
The bigger risk is personal. Income tax and FICA withheld from an employee’s paycheck are held “in trust” for the government. If a business owner, officer, or anyone with authority over the company’s finances willfully fails to turn those funds over, the IRS can assess the Trust Fund Recovery Penalty, equal to 100% of the unpaid trust-fund taxes, against that individual personally. It survives bankruptcy and corporate dissolution.14Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax Section 6672 lets the IRS skip the corporate shield and pursue the responsible person directly, which is where cash-under-the-table arrangements most often catch up with employers.
Household Employers Who Pay in Cash
Cash pay is common for nannies, housekeepers, and home health aides, and the rules catch a lot of families off guard. If you pay a household employee $3,000 or more in cash wages during 2026, you have to withhold and pay Social Security and Medicare taxes on those wages.15Internal Revenue Service. Publication 926 (2026), Household Employers Tax Guide Once that threshold is crossed, all cash wages paid to the employee that year become subject to FICA, not just the amount above $3,000. Household employers report these taxes on Schedule H, filed with their personal Form 1040.
Independent Contractors Paid in Cash
If you are paid in cash as an independent contractor rather than an employee, no one withholds anything for you and the entire tax burden lands in your lap. For 2026, a business must issue Form 1099-NEC to any contractor paid $2,000 or more during the year, up from the previous $600 threshold for payments made after December 31, 2025.16Internal Revenue Service. Form 1099-NEC and Independent Contractors You owe tax on every dollar you receive even when no 1099 is issued.
Self-Employment Tax
Contractors owe self-employment tax at a combined 15.3%, covering both the employer and employee shares of Social Security and Medicare.17Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) It is calculated on Schedule SE and filed with your Form 1040, with business income and expenses first reported on Schedule C.18Internal Revenue Service. Topic No. 554, Self-Employment Tax You can deduct half of your self-employment tax when calculating adjusted gross income.
Quarterly Estimated Taxes
Because nothing is withheld from your cash payments, you generally have to make estimated tax payments on Form 1040-ES. The requirement applies if you expect to owe at least $1,000 for the year after any withholding and refundable credits.19Internal Revenue Service. Estimated Taxes The 2026 due dates are April 15, 2026 (for income from January through March), June 15, 2026 (April and May), September 15, 2026 (June through August), and January 15, 2027 (September through December).20Internal Revenue Service. Estimated Tax Missing payments or underpaying triggers an underpayment penalty that accrues on the shortfall each quarter.21Office of the Law Revision Counsel. 26 U.S. Code 6654 – Failure by Individual to Pay Estimated Income Tax Many contractors paid in cash spend the money as it comes in and discover the problem the following April.
Overtime When Part of the Pay Is Cash
Cash wages count toward an employee’s regular rate of pay for overtime. The FLSA defines the regular rate to include all compensation for employment unless a specific exclusion applies.22U.S. Department of Labor. Fact Sheet 56A: Overview of the Regular Rate of Pay Under the Fair Labor Standards Act (FLSA) An employer cannot pay a base wage by check and then hand over extra cash “on the side” without folding that cash into the overtime math. Total weekly compensation divided by total hours worked gives the regular rate, and time-and-a-half applies past 40 hours. When unrecorded cash is left out of the calculation, every overtime payment to that worker is wrong, and the back-wage exposure under the FLSA stacks on top of any tax penalties.