Paying employees in cash is not illegal, but paying them in cash without proper tax withholding and recordkeeping absolutely is. The difference between a legal cash payroll and a criminal one comes down to what you do with those taxes.
Most people assume cash pay equals under-the-table pay. That assumption is wrong. Restaurants, construction companies, farms, and countless small businesses pay workers in cash every week legally. The method of payment isn’t the issue. Skipping the taxes is.
The IRS estimates that the “underground economy” of unreported wages costs the federal government tens of billions in lost tax revenue annually. That’s why enforcement is aggressive.
This article covers exactly where the legal line sits, what IRS rules apply, what state laws require, what the specific penalties are, and what makes cash payroll cross into criminal territory in 2026.
Is It Illegal to Pay Employees Cash?
Paying employees in cash is not illegal. Federal law does not prohibit employers from using cash as the form of payment for wages. What the law requires is that all proper payroll taxes be withheld and remitted regardless of how the employee is paid.
The Fair Labor Standards Act (FLSA) establishes minimum wage and overtime requirements but does not specify the form that payment must take. The IRS requires employers to withhold federal income tax, Social Security, and Medicare from every employee’s wages under Internal Revenue Code Sections 3102 and 3111. Neither law says payment must be by check, direct deposit, or any other specific method.
Cash payroll is particularly common in agriculture, construction, food service, childcare, and domestic work. These industries have long histories of cash-based labor markets, and the law accommodates that reality as long as the tax and wage obligations are met.
Quick Facts:
- Federal law: Cash payroll is legal when taxes are properly withheld
- IRS requirement: All wages, regardless of payment method, subject to withholding
- FLSA requirement: Cash wages must meet minimum wage and overtime standards
- Recordkeeping: Required under 29 CFR 516 regardless of payment method
- State law: Some states have additional requirements for cash payroll
The legal risk is not in the cash. It’s in what happens next. An employer who pays cash and properly withholds taxes, keeps records, issues W-2s, and files Form 941 quarterly is operating within the law. An employer who pays cash and skips all of that is committing multiple federal crimes.
Is It Legal to Pay Employees in Cash?
Paying employees in cash is legal in the United States when the employer follows all applicable federal and state payroll obligations. The IRS has no rule against cash wages. State departments of labor generally do not prohibit cash payroll either.
The legal framework treats cash wages identically to wages paid by any other method. The same withholding requirements apply. The same minimum wage protections apply. The same recordkeeping obligations apply. The same Form W-2 must be issued at year end. Changing the method of delivery from a check to an envelope of bills changes nothing about the legal obligations surrounding those wages.
Some states have additional rules that affect how cash wages must be documented. California, New York, and several other states require detailed written wage statements (paystubs) that show gross pay, deductions, net pay, pay period dates, and other information. These requirements apply even when the actual payment is in cash.
| State | Paystub Required with Cash Pay? | Statute | Key Information Required |
|---|---|---|---|
| California | Yes | Labor Code 226 | Gross wages, deductions, pay period dates, employer info |
| New York | Yes | Labor Law 195 | Gross wages, deductions, pay period dates |
| Texas | Yes (on request) | Payday Law 61.014 | Wage statement available on demand |
| Florida | No specific requirement | No paystub statute | No mandate |
| Illinois | Yes | 820 ILCS 115/10 | Itemized statement of deductions |
| Washington | Yes | RCW 49.46.090 | Earnings statement required |
The practical answer: cash payroll is legal when the employer treats it with the same tax and compliance seriousness as any other payroll method.
Is It Illegal to Pay Employees in Cash?
Paying employees in cash is not illegal when done correctly. It becomes illegal the moment the employer uses cash as a vehicle to avoid paying taxes, skip recordkeeping, or hide wages from regulatory oversight.
The distinction is between “cash payroll” and “paying under the table.” Cash payroll means the employee receives physical currency but the employer still withholds federal income tax, Social Security, and Medicare, still files quarterly Form 941 reports with the IRS, and still issues a W-2 at year end. Paying under the table means none of those things happen.
When a business pays cash wages without withholding taxes, it is simultaneously committing multiple violations. It is failing to deposit federal employment taxes under IRC Section 6656. It is failing to pay the employer’s share of FICA taxes under IRC Sections 3111. And if the omission is willful, it potentially constitutes felony failure to collect or pay over taxes under IRC Section 7202.
Scenarios where cash payroll becomes illegal:
- Employer pays cash but withholds no taxes from employee wages
- Employer pays cash but fails to remit withheld taxes to the IRS
- Employer pays cash but issues no W-2 at year end
- Employer pays cash but maintains no payroll records
- Employer pays cash to avoid workers’ compensation insurance obligations
- Employer pays cash to hide wages from unemployment insurance calculations
Each of these creates separate legal exposure. Together they can result in criminal prosecution.
Key Takeaway: Cash payroll is legal. Under-the-table payroll disguised as cash payroll is not. The legality depends entirely on whether the employer meets all tax withholding, remittance, and reporting obligations, not on the physical form of the payment.
Can You Pay Employees in Cash Legally?
Yes, employers can legally pay employees in cash when they comply with federal payroll tax requirements, federal and state wage laws, and applicable recordkeeping mandates. Millions of legal cash payroll transactions occur in the United States every week.
The steps required to pay employees legally in cash are identical to the steps required for any other payroll method:
- Determine the employee’s gross wages for the pay period
- Calculate and withhold federal income tax based on the employee’s W-4
- Withhold the employee’s share of Social Security (6.2%) and Medicare (1.45%)
- Remit all withheld taxes plus the employer’s matching FICA contribution to the IRS by the applicable deposit deadline
- File Form 941 quarterly (or Form 944 annually for small employers)
- Issue a W-2 to each employee by January 31 of the following year
- File Copy A of W-2s with the Social Security Administration
- Maintain payroll records for at least four years under IRS requirements
If an employer does all of these things and simply delivers the net wages in cash instead of by check, the transaction is entirely legal.
Bold callout: The IRS does not care whether you pay by direct deposit, check, or cash. The IRS cares whether you collected, held, and remitted the employment taxes. Failure to remit is a federal crime regardless of how the employee was paid.
Is It Illegal to Not Pay Employees?
Not paying employees for work performed is illegal under both federal and state law. The FLSA requires employers to pay all non-exempt employees at least the federal minimum wage for all hours worked. Failure to pay constitutes a wage violation regardless of any business dispute, cash flow problem, or misunderstanding about the employment relationship.
The Department of Labor Wage and Hour Division enforces the FLSA’s minimum wage requirements. Employees who are not paid can file a wage claim with the DOL or pursue a private lawsuit. Under 29 U.S.C. 216(b), employees who win unpaid wage claims are entitled to all back wages owed plus an equal amount as liquidated damages, plus attorney fees and court costs.
State wage payment laws add independent remedies. California Labor Code Section 1197.1 authorizes civil penalties up to $250 per employee per pay period for initial violations and $1,000 per employee per pay period for repeat violations. New York Labor Law Section 198 allows employees to recover back wages plus 100% liquidated damages plus attorney fees.
Non-payment scenarios and their legal status:
- Employee worked, employer paid nothing: Clear FLSA violation, state wage violation
- Employer paid less than minimum wage in cash: FLSA violation
- Employer withheld wages as punishment: Illegal in all states
- Employer delayed pay past state payday deadline: State wage payment violation
- Employer claims worker is independent contractor to avoid paying: Possible misclassification violation
Not paying employees in cash is not more or less illegal than not paying by any other method. The obligation to pay exists regardless of payment form.
Paying Employees Cash Under the Table
Paying employees cash under the table means paying wages in cash without withholding taxes, keeping payroll records, or reporting the wages to the IRS. This is illegal and constitutes multiple simultaneous federal crimes.
The phrase “under the table” is not a legal term but an informal description of what employers do when they try to hide wages from tax authorities. The employer pays cash, the employee receives cash, and neither party reports the transaction to the IRS or any government agency. The employer avoids paying their share of payroll taxes. The employee avoids income and employment taxes. Both parties potentially commit crimes.
From the employer’s perspective, under-the-table cash payments create exposure to:
- Failure to collect and pay over employment taxes (IRC Section 7202, felony)
- Failure to deposit employment taxes (IRC Section 6656, civil penalty)
- Trust Fund Recovery Penalty (IRC Section 6672, personal liability)
- Employment tax fraud (IRC Section 7201, felony)
- Workers’ compensation insurance fraud in states where it applies
- State unemployment insurance fraud
From the employee’s perspective, accepting under-the-table cash wages and not reporting them as income constitutes tax evasion under IRC Section 7201. The IRS can audit and assess back taxes, penalties, and interest against employees who fail to report cash wages.
Think of it like driving without registration. Using cash to pay wages is like the make and model of the car; perfectly legal. Hiding the taxes is like driving without registration; illegal regardless of what car you’re driving.
Is It Illegal to Pay Someone Cash Under the Table?
Yes, paying someone cash under the table when they are your employee is illegal. It violates federal tax law, federal wage law, and in most cases state law simultaneously. The illegality applies to both the employer and, if they knowingly participate, the employee.
The legal analysis distinguishes between paying a true independent contractor in cash for a legitimate service and paying an employee in cash while hiding the wages from tax authorities. Paying an independent contractor cash is legal when the contractor relationship is genuine and the payment is properly reported on Form 1099-NEC (for payments of $600 or more).
The misclassification trap catches many employers. They call workers independent contractors to avoid payroll taxes and benefits, then pay in cash. If the IRS or a state labor agency determines the workers are actually employees (which they often do, using the IRS 20-factor test or similar analysis), the employer owes all back employment taxes with penalties and interest.
| Payment Scenario | Legal Status | IRS Form Required | Tax Liability |
|---|---|---|---|
| Cash to employee, taxes withheld | Legal | W-2 | Employer withholds and matches FICA |
| Cash to employee, no taxes withheld | Illegal | W-2 still required | Employer liable for all unpaid taxes |
| Cash to true independent contractor | Legal | 1099-NEC if $600+ | Contractor pays self-employment tax |
| Cash to misclassified “contractor” | Illegal | W-2 should have been issued | Employer owes all employment taxes |
| Cash off the books entirely | Illegal | No form issued | Criminal exposure for employer and employee |
The consequences for misclassification and under-the-table payment compound quickly when the IRS or a state labor agency opens an investigation.
What Happens If You Pay Employees Under the Table?
Paying employees under the table triggers a series of overlapping legal consequences from multiple government agencies simultaneously. The IRS, the Department of Labor, state labor agencies, and state tax authorities can all take action independently.
The IRS is typically the most aggressive enforcer. When the IRS discovers under-the-table payroll (through audits, employee complaints, competitor tips, or matching discrepancies in W-2 and 1099 filings), it assesses all unpaid employment taxes, adds failure-to-deposit penalties, failure-to-file penalties, and accruing interest.
The Trust Fund Recovery Penalty (TFRP) under IRC Section 6672 is particularly dangerous. The TFRP makes individual business owners, officers, and sometimes bookkeepers personally liable for the employee share of withheld Social Security and Medicare taxes that were never remitted. This penalty cannot be discharged in bankruptcy. It follows the individual personally, not just the business entity.
Sequence of events when under-the-table payroll is discovered:
- IRS opens an employment tax examination
- Back taxes, penalties, and interest are assessed against the business
- Trust Fund Recovery Penalty is assessed personally against responsible individuals
- State tax authority opens parallel investigation for state income tax withholding
- State labor agency investigates for wage payment, workers’ comp, and unemployment insurance violations
- Criminal referral to IRS Criminal Investigation if willfulness is established
- Potential prosecution under IRC Sections 7201 or 7202
Each step carries its own financial and legal consequences. The total liability from an under-the-table payroll scheme can be several times the original amount of taxes avoided.
Key Takeaway: Paying employees under the table creates simultaneous liability to the IRS, state tax agencies, state labor agencies, and potentially criminal prosecutors. The Trust Fund Recovery Penalty under IRC Section 6672 makes individual business owners personally liable for unpaid payroll taxes in a way that cannot be eliminated through business bankruptcy.
Is Paying Employees Cash Tax Fraud?
Paying employees cash is not tax fraud. Paying employees cash while intentionally failing to report wages, withhold taxes, or remit employment taxes to the IRS is tax fraud. The cash method of payment is irrelevant; the intent to evade taxes is what creates the crime.
Tax fraud in the payroll context is prosecuted under two primary federal statutes. IRC Section 7201 criminalizes willful attempts to evade or defeat any federal tax. IRC Section 7202 specifically criminalizes willful failure to collect, account for, and pay over employment taxes. Both are felonies with prison terms up to five years per count.
The word “willful” is the legal dividing line. An employer who makes good-faith payroll mistakes, even significant ones, is generally treated as civilly liable rather than criminally liable. An employer who deliberately pays cash to avoid generating records, instructs employees not to report wages, or uses false documents to conceal the scheme faces criminal prosecution.
Evidence that prosecutors use to establish willfulness in cash payroll fraud cases:
- Instructions to employees to not report cash wages
- False business records that omit cash wage payments
- Refusal to respond to IRS notices about employment tax discrepancies
- Pattern of cash payments with no corresponding payroll tax deposits
- Large cash withdrawals that appear to fund an unreported payroll
- Employee testimony that they were told the wages were “off the books”
IRS Criminal Investigation (CI) pursues these cases when the dollar amount is significant and the evidence of willfulness is strong. Convictions carry prison time, restitution of all unpaid taxes, and civil penalties on top of the criminal sentence.
IRS Rules for Paying Employees in Cash
IRS rules for paying employees in cash are exactly the same as the rules for paying by any other method. The IRS distinguishes not by payment form but by tax compliance status.
The core federal tax obligations for cash payroll under IRS Publication 15 (Circular E) include:
Withholding requirements:
- Federal income tax: Based on employee’s Form W-4 filing status and allowances
- Social Security: 6.2% of wages up to the annual wage base (adjusted annually; in 2025 the wage base was $176,100)
- Medicare: 1.45% of all wages, plus an additional 0.9% for wages over $200,000
Employer tax obligations:
- Employer’s share of Social Security: Matching 6.2%
- Employer’s share of Medicare: Matching 1.45%
- Federal Unemployment Tax (FUTA): 6% on first $7,000 of each employee’s wages (net rate typically 0.6% after state credit)
Deposit schedule under IRC Section 6302:
- Semiweekly depositors: For employers with more than $50,000 in employment taxes in the prior lookback period
- Monthly depositors: For employers with $50,000 or less in employment taxes in the prior lookback period
- Next-day rule: For any single payroll deposit exceeding $100,000
Filing requirements:
- Form 941: Quarterly, due by the last day of the month following each quarter
- Form 944: Annual alternative for employers with $1,000 or less in annual employment taxes
- Form W-2: Due to employees by January 31 and to SSA by January 31
- Form W-3: Transmittal summary to SSA with all W-2s
None of these obligations change because the wages were paid in cash.
Payroll Tax Requirements for Cash Payments
Payroll tax requirements for cash payments are identical to those for any other payment method. The form of payment does not modify the employer’s obligation to withhold, deposit, and report employment taxes.
The FICA tax obligations under IRC Sections 3101 through 3111 apply to all wages. “Wages” under the IRC is defined broadly at IRC Section 3121(a) to include any remuneration for employment, without reference to the payment method. Cash payments that constitute wages trigger the same FICA obligations as direct deposits.
The critical compliance point for cash payroll is the deposit deadline. Many small employers who pay cash fall behind on tax deposits, either because they spend the cash before setting aside the tax portion or because they underestimate the deposit obligation. Missing deposit deadlines triggers the failure-to-deposit penalty under IRC Section 6656.
| Deposit Timing | Penalty Rate | IRC Reference |
|---|---|---|
| 1 to 5 days late | 2% of unpaid deposit | IRC 6656(b)(1)(A)(i) |
| 6 to 15 days late | 5% of unpaid deposit | IRC 6656(b)(1)(A)(ii) |
| More than 15 days late | 10% of unpaid deposit | IRC 6656(b)(1)(A)(iii) |
| After IRS notice to pay | 15% of unpaid deposit | IRC 6656(b)(1)(B) |
The penalty table makes clear that the IRS does not give much grace period. A deposit that is even one day late triggers a 2% penalty immediately. Employers who fall behind on cash payroll deposits can accumulate significant penalties within a single quarter.
Employers who pay in cash and want to stay compliant should set aside the tax portion of every payroll immediately upon payment, before the cash leaves their control.
Penalties for Paying Employees Under the Table
Penalties for paying employees under the table combine IRS civil penalties, the Trust Fund Recovery Penalty, and potential criminal sentencing. The total exposure for a multi-year under-the-table payroll scheme can be devastating.
Civil IRS penalties for employment tax violations:
- Failure to deposit (IRC 6656): 2% to 15% of unpaid deposits depending on lateness
- Failure to file (IRC 6651): 5% per month of tax owed, up to 25%
- Failure to pay (IRC 6651(a)(2)): 0.5% per month of unpaid tax, up to 25%
- Trust Fund Recovery Penalty (IRC 6672): 100% of the employee’s share of withheld taxes, assessed personally
Criminal penalties:
- Willful failure to collect or pay employment taxes (IRC 7202): Felony, up to five years prison per count plus fines
- Tax evasion (IRC 7201): Felony, up to five years prison plus fines up to $250,000 for individuals
- Filing false returns (IRC 7206): Felony, up to three years prison
| Violation | Penalty Type | Amount | Criminal? |
|---|---|---|---|
| Late deposit (1-5 days) | Civil | 2% of deposit | No |
| Late deposit (15+ days) | Civil | 10% of deposit | No |
| TFRP (IRC 6672) | Civil, personal | 100% of employee share | No |
| Willful failure to pay (IRC 7202) | Criminal | Up to 5 years prison | Yes |
| Tax evasion (IRC 7201) | Criminal | Up to 5 years + $250,000 fine | Yes |
The TFRP deserves special emphasis. Unlike most business tax liabilities, the TFRP is assessed against individuals personally. The IRS can pursue the business owner’s personal bank accounts, home, and other personal assets to collect the Trust Fund Recovery Penalty. Forming an LLC or corporation does not protect against it.
Do You Have to Give Employees a Paystub When Paying Cash?
Whether you must give employees a paystub when paying cash depends on your state. Federal law does not require employers to issue paystubs, but the FLSA does require employers to maintain payroll records. Many states impose specific paystub requirements that apply regardless of how payment is made.
States with mandatory paystub requirements include California, New York, Texas, Washington, Oregon, Illinois, and the majority of others. These states require a written or electronic wage statement for each pay period that shows specific information including gross wages, deductions, net wages, pay period dates, and employer identification.
California Labor Code Section 226 requires nine specific categories of information on every wage statement, including total hours worked, gross wages earned, net wages earned, all deductions, the inclusive dates of the pay period, the name and address of the employer, and the employee’s Social Security number (last four digits). This applies to all employees regardless of payment method.
| State | Paystub Required? | Method Accepted | Key Statute |
|---|---|---|---|
| California | Yes | Written or electronic | Labor Code 226 |
| New York | Yes | Written or electronic | Labor Law 195(3) |
| Texas | Yes (on request) | Written | Payday Law 61.014 |
| Florida | No state requirement | N/A | No statute |
| Illinois | Yes | Written or electronic | 820 ILCS 115/10 |
| Washington | Yes | Written or electronic | RCW 49.46.090 |
| Pennsylvania | Yes | Written or electronic | WPCL Section 3 |
In states where paystubs are mandatory, failing to provide one is a separate violation from any payroll tax issues. California imposes a penalty of $50 for the first paystub violation per employee and $100 per employee per pay period for subsequent violations, up to $4,000 per employee.
Is It Illegal to Not Give Employees a Paystub?
Not giving employees a paystub is illegal in most US states when their laws require it. As of 2026, the majority of states have enacted wage statement requirements that mandate employers provide detailed pay information each pay period.
States with strict paystub laws impose penalties for violations that are separate from and in addition to any other wage law violations. California’s penalties under Labor Code Section 226(e) allow employees to recover actual damages or $50 per employee for the first violation and $100 per employee for each subsequent violation in a pay period, up to a maximum of $4,000 per employee, plus attorney fees and costs.
New York Labor Law Section 195(3) requires a pay stub at each payment of wages. Violations of the New York Wage Theft Prevention Act’s pay stub requirements carry civil penalties of $250 per day per employee up to $5,000 per employee, plus potential criminal charges for willful violations.
States with no paystub requirement as of 2026 include Florida, Alabama, Arkansas, Georgia, Louisiana, Mississippi, Ohio, South Carolina, and a few others. Employees in these states have no state law right to a paystub, though they retain federal FLSA rights to access payroll records.
For employers paying in cash specifically, the absence of a paystub creates an evidentiary problem if a wage dispute arises. Without a paper trail, the employer has difficulty proving what was paid, when, and to whom. Courts and labor agencies will generally credit the employee’s account of wages owed when no employer records exist.
Key Takeaway: Paystub requirements apply to cash payroll in most states and create separate legal exposure from payroll tax violations. California and New York have the strictest paystub laws, with per-employee-per-pay-period penalties that can quickly multiply in a workforce of any size.
Cash Payroll Laws by State
Cash payroll laws vary by state across three main dimensions: whether the state imposes additional payroll frequency requirements, what paystub or wage statement information must be provided, and what penalties apply when those requirements are violated.
Federal law sets the floor through the FLSA’s minimum wage and overtime rules. State laws frequently exceed that floor, and employers paying in cash must comply with the stricter of the federal and state requirements in each jurisdiction.
States with the most demanding cash payroll compliance frameworks are California, New York, Massachusetts, Illinois, and Washington. These states combine mandatory paystubs, specific pay frequency requirements, and significant civil penalties for violations.
| State | Pay Frequency Requirement | Paystub Mandatory? | Penalty for Violations | Statute |
|---|---|---|---|---|
| California | Weekly/biweekly for most industries | Yes | $50-$100/employee/pay period | Labor Code 204, 226 |
| New York | Weekly for manual workers, biweekly or semimonthly for others | Yes | $250/day per employee up to $5,000 | Labor Law 191, 195 |
| Massachusetts | Weekly for certain employees | Yes | Specific penalties have not been publicly confirmed | GL Ch. 149 |
| Illinois | Semimonthly | Yes | Damages plus 2% monthly interest | 820 ILCS 115 |
| Texas | Semimonthly at minimum | Yes (on request) | Civil penalties | Payday Law Ch. 61 |
| Florida | No specific frequency | No | Limited state penalties | No specific statute |
The variation in pay frequency requirements matters for cash payroll specifically because cash is often paid more informally, sometimes weekly or even daily in industries like agriculture or day labor. An employer paying daily in a state that requires semimonthly paydays may be creating a pay frequency violation even if the amounts are correct.
Can a Business Legally Pay Workers in Cash?
Yes, a business can legally pay workers in cash as long as it meets all applicable federal and state payroll, tax, and recordkeeping requirements. The business form (LLC, S-corp, sole proprietorship) does not affect the legality of cash payments; the tax compliance obligations remain the same regardless of entity type.
Certain industries use cash payroll more frequently than others. Agriculture has used cash payroll historically and the IRS has specific guidance addressing agricultural employers. Domestic employers (household workers, nannies, housekeepers) commonly pay cash and have a simplified payroll tax framework through the “nanny tax” provisions under IRC Section 3510. Construction, food service, and retail also see high rates of cash payroll.
For any business paying workers in cash legally, the documentation requirements are non-negotiable:
- Maintain time records showing hours worked for hourly employees (29 CFR 516.2)
- Keep records of all wages paid for at least three years for payroll purposes and at least four years for tax purposes
- Obtain a signed W-4 from each employee before their first paycheck
- Issue W-2 forms by January 31 each year
- File quarterly Form 941 (or annual Form 944 if eligible)
- Provide required state wage statements each pay period
One practical challenge with cash payroll is documentation of payment itself. For a check or direct deposit, the bank record proves payment occurred. For cash, the employer needs signed receipts from employees acknowledging receipt of each payment. Without signed receipts, an employee could claim wages were never paid, and the employer would have difficulty proving otherwise.
Bold callout: The IRS requires employers to maintain all employment tax records for at least four years after the tax becomes due or is paid, whichever is later, under IRC Section 6001 and corresponding regulations. Cash payroll employers who keep no records face the maximum exposure in any audit.
Frequently Asked Questions
Is paying employees cash the same as paying under the table?
No, paying employees cash is not the same as paying under the table.
Cash payroll means delivering wages in physical currency while still withholding taxes, keeping records, and issuing W-2s.
Paying under the table means paying cash while hiding the wages from the IRS and not withholding or remitting any taxes.
The first is legal; the second is a federal crime.
What taxes must employers withhold when paying cash wages?
Employers must withhold federal income tax based on the employee’s W-4, Social Security at 6.2%, and Medicare at 1.45% from all cash wages.
The employer must also contribute a matching 6.2% Social Security and 1.45% Medicare from their own funds.
Federal unemployment tax (FUTA) applies at 6% of the first $7,000 of each employee’s wages annually.
State income tax withholding and state unemployment insurance taxes apply in states that have them, regardless of whether wages are paid in cash or by check.
What is the penalty for paying employees under the table?
Civil penalties for under-the-table payroll include failure-to-deposit penalties ranging from 2% to 15% under IRC Section 6656, plus all back taxes owed with interest.
The Trust Fund Recovery Penalty under IRC Section 6672 makes individual business owners personally liable for 100% of the employee share of unremitted payroll taxes.
Criminal penalties for willful failure to pay over employment taxes under IRC Section 7202 include up to five years in federal prison per count.
State penalties for wage and tax violations add separately to the federal exposure.
Do employees have to report cash wages on their taxes?
Yes, employees must report all cash wages as income on their federal and state tax returns, regardless of whether their employer issued a W-2.
Cash wages are still “wages” under the Internal Revenue Code and are subject to federal income tax.
If no W-2 was issued, the employee should report the income on their tax return using Form 4137 for unreported tips or simply report the amount as wages.
Employees who knowingly fail to report cash wages they received commit tax evasion under IRC Section 7201.
Can an employer go to jail for paying employees cash under the table?
Yes, an employer can go to jail for paying employees cash under the table when the IRS establishes that the omission was willful.
IRC Section 7202 makes willful failure to collect, account for, and pay over employment taxes a felony punishable by up to five years in prison per count.
Tax evasion under IRC Section 7201 carries an additional penalty of up to five years in prison and fines up to $250,000 for individuals.
IRS Criminal Investigation regularly prosecutes cash payroll fraud cases when the dollar amounts are substantial and the evidence of intent is clear.
Cash payroll is one of those areas where the gap between what’s legal and what’s illegal is enormous in consequences but sometimes small in apparent behavior. The difference between a compliant cash payroll and a criminal one can be as simple as whether the employer set aside the tax money and sent it to the IRS.
Bookmark this page before making any payroll decisions for your business. The rules are consistent and knowable, and following them protects both the business and its workers from serious legal exposure in 2026 and beyond.
