Question: Can I pay my employees in cash?
Answer: Yes, you can pay your employees in cash but it is a bad idea for the following reasons.
- If you were ever audited by the IRS, there will be no record or paper-trail that you actually paid the employee. The IRS could disallow your deduction for having paid employees if you do not have the proper records.
- An employee could disagree on the amount they were paid or even deny that they were paid. This could create legal problems.
- It would create a bookkeeping headache for the payroll processes.
Therefore, when we get asked the question of “can I pay my employees in cash”, the answer is a “yes” but it is not recommended. You should protect yourself by having a paper-trail of transactions connecting the payment from you to the employees (such as a check or direct-deposit). With cash as the form of payment, it’s not easy to prove. Therefore, you risk the chance of the IRS saying that you can’t deduct the wages paid to your employees or an employee filing a legal dispute against you (maliciously or not) saying that they were not paid or not paid in full.