Some small businesses pay a few staff in cash because a customer paid them in cash, the bank is far away, or a worker has no account. Nothing in federal law stops you. What makes cash pay legal or illegal is what happens around it: the withholding, the tax deposits, the records and the year-end forms. This post covers each, with the IRS and Department of Labor rules for 2026.
Is it legal to pay employees in cash?
Yes. IRS Publication 15 (2026) says wages subject to federal employment taxes include all pay you give an employee for services, and that the pay may be in cash or in other forms. It defines cash wages as checks, money orders and any kind of money or cash. So a $600 envelope on Friday is the same wage, for tax purposes, as a $600 direct deposit.
What isn't legal is paying cash "off the books", where the withholding, the employer taxes and the record are all skipped. That is a failure to collect and pay employment taxes. Publication 15 describes the trust fund recovery penalty for withheld taxes that aren't paid over: 100% of the unpaid tax, which the IRS can assess personally against anyone responsible who willfully failed to collect or pay it.
Some states set their own rules on how wages are paid. Virginia's Code § 40.1-29, for example, lists lawful money of the United States among the permitted methods. Check your state labor department if you plan to pay everyone in cash.
What you withhold and pay on cash wages
The same as on any other wage. For 2026, Publication 15 gives these rates:
| Tax | Employee share (withheld) | Employer share |
|---|---|---|
| Federal income tax | From Form W-4 and the IRS withholding tables | None |
| Social Security | 6.2% up to $184,500 | 6.2% up to $184,500 |
| Medicare | 1.45% on all wages | 1.45% on all wages |
| Federal unemployment (FUTA) | None | 6.0% on the first $7,000, reduced by a credit of up to 5.4% for state unemployment tax |
A worked example: an employee paid $600 in cash for a week. You withhold $37.20 Social Security and $8.70 Medicare, plus any federal and state income tax their W-4 calls for. With no income tax due, the envelope holds $554.10. You owe a matching $37.20 and $8.70 yourself, plus state unemployment and FUTA.
The tax itself never goes in cash. Publication 15 says you must use electronic funds transfer for all federal tax deposits, through EFTPS, IRS Direct Pay or your IRS business tax account. Most employers report these taxes quarterly on Form 941.
The records to keep when you pay in cash
Cash leaves no bank trail, so your own records are the only proof of what you paid. Two sets of rules apply.
- IRS: keep all employment tax records for at least 4 years. Publication 15 lists your EIN, the amounts and dates of wage payments, employee names and Social Security numbers, and the dates and amounts of tax deposits.
- Department of Labor: Fact Sheet #21 requires, for nonexempt workers, hours worked each day and week, the pay rate, straight-time and overtime earnings, additions and deductions, total wages each pay period and the date of payment. Payroll records are kept for 3 years, time cards and wage rate tables for 2.
- A signed receipt for each cash payment. No rule names it, but a receipt with the date, gross pay, deductions and net cash handed over is the simplest way to show the payment happened if a dispute or audit comes.
Fact Sheet #21 says the law doesn't require a particular form, only that the records are accurate and complete. A pay stub with a copy for you covers most of the list in one document.
Do cash-paid employees need a pay stub?
Federally, no; in many states, yes. The Department of Labor's FLSA FAQ says the FLSA does not require an employer to provide pay stubs. State law often does, and it doesn't care how the money is handed over. New York's Department of Labor says workers must receive a wage statement each time they are paid, whether by cash or by check. Pennsylvania's labor department says employers must give a pay stub each pay period showing hours worked, rate, gross wages, deductions and the pay period dates.
Even where a stub isn't required, it protects you. It shows the employee what was withheld and why the cash is less than the agreed rate, and it gives both of you a running year-to-date total for the W-2. Our guide to pay stub requirements by state lists each state's rule.
Year-end forms for cash wages
Cash wages go on Form W-2 like any other wages. For 2026, the W-2 instructions say employee copies are due by February 1, 2027, and Copy A goes to the Social Security Administration by the same date. If someone leaves mid-year and asks for their W-2, give it within 30 days of the request or of the last wage payment, whichever is later.
Household employers follow Publication 926 instead. For 2026, Social Security and Medicare apply once you pay one household employee $3,000 or more in cash wages, and you report the taxes on Schedule H with your Form 1040.
A checklist for paying wages in cash
- Get an EIN and register with your state for withholding and unemployment tax.
- Have the employee complete Form W-4 and Form I-9 when they start, as Publication 15 asks.
- Each payday, work out gross pay from hours and rate, withhold the taxes, and hand over the net amount.
- Give a pay stub showing gross pay, each deduction, net pay and year-to-date totals; keep a copy.
- Get a signed receipt for the cash.
- Deposit the withheld and employer taxes electronically on your deposit schedule and file Form 941 each quarter.
- Issue the W-2 by February 1, 2027 for 2026 wages.
Where PayDocs fits
PayDocs makes the pay stub you hand over with the cash: hours, rate, gross pay, each deduction, net pay and year-to-date totals, from your payroll figures. PayDocs works out federal income tax, Social Security, Medicare and supported state taxes for 2026 pay dates (see what we calculate). Every line is editable, and the preview is free.
PayDocs doesn't deposit or file payroll taxes, and a pay stub doesn't replace them. This is general information, not tax or legal advice.
Questions
Is it legal to pay employees in cash?
Yes. IRS Publication 15 says wages may be paid in cash or other forms. You still withhold income tax, Social Security and Medicare, pay the employer share, deposit the taxes electronically and keep records, as with any paycheck.
Do I have to withhold taxes from cash wages?
Yes. Cash wages are wages. For 2026 you withhold 6.2% Social Security up to $184,500, 1.45% Medicare, and federal income tax based on the employee's W-4, plus any state taxes.
Can I pay payroll taxes in cash?
No. Publication 15 says all federal tax deposits must be made by electronic funds transfer, through EFTPS, IRS Direct Pay or your IRS business tax account.
Do cash-paid employees need a pay stub?
Federal law doesn't require one, but many states do. New York, for example, requires a wage statement each time an employee is paid, whether by cash or by check.
How long do I keep records of cash wages?
At least 4 years for IRS employment tax records. The Department of Labor asks for 3 years of payroll records and 2 years of time cards and wage rate tables.
Sources
- IRS: Publication 15 (2026), Employer's Tax Guide
- U.S. Department of Labor: Fact Sheet #21, Recordkeeping Requirements under the FLSA
- U.S. Department of Labor: Questions and answers about the FLSA
- New York State Department of Labor: Wage statements
- Pennsylvania Department of Labor and Industry: Wage FAQs
- IRS: General Instructions for Forms W-2 and W-3 (2026)
- IRS: Publication 926 (2026), Household Employer's Tax Guide
- Code of Virginia § 40.1-29
Sources checked October 8, 2026. This article explains how pay documents work; it is not tax or legal advice.
