Pros and Cons of Getting Paid in Cash (w/ Legal Implications)

Knowing the pros and cons of getting paid in cash will help you handle your wages correctly when receiving physical currency. On the one hand, you get immediate access to your funds and avoid bank fees; on the other hand, you take on long-term risks, lack proof of income, and may even run into legal issues.

While some associate getting paid like this with “off-the-books” transactions made in attempts to avoid cash wages tax, this can be a legitimate part of the payroll process. We’ll discuss the legality of cash payments in this article before diving into its benefits and drawbacks, as well as explain how to report cash wages and what to do when you need proof of income.

Is Getting Paid in Cash Legal?

Yes, getting paid in cash is legal in the United States; the Fair Labor Standards Act (FLSA) doesn’t govern which method employers must use to pay their employees. This means cash payments are just as legal as physical checks, direct deposits, and payroll cards.

However, to ensure their legality, employers must report and document cash payments appropriately. While these aren’t automatically recorded (unlike direct deposits, which provide an electronic trail for both the payer and the payee), they are still subject to the same tax laws.

When using cash to pay their employees, employers are required to:

• Adhere to minimum wage requirements and overtime pay laws
• Issue accurate and detailed pay stubs and Forms 109
• Withhold the correct amount of federal income, Social Security, and Medicare taxes from paychecks

Businesses that pay employees in cash are also required to issue them Form W-2, Wage and Tax Statement, at the end of the year. Conversely, all cash payments made to independent contractors that exceed $600 in a year must be reported using Form 1099-NEC, Nonemployee Compensation.

If an employer pays you in cash to avoid taxes or overtime, you are participating in an illegal arrangement often referred to as “under the table pay.” In this case, while you may not face the same penalties as your employer, you’re still required to report any income earned and pay taxes on it.

Pros of Getting Paid in Cash

There are many benefits and practical advantages to getting paid in cash. Let’s see some of the biggest reasons why people often say “cash is king.”

#1. Immediate Access to Money

One of the biggest benefits of getting paid in cash is instant liquidity. With checks or electronic transfers, banks may hold your funds for several days to verify that everything is in order. You may also encounter delays with processing during holidays or weekends.

With cash, you get to spend the funds the moment you get them. This is particularly important to those who rely on a frequent income (daily or weekly payroll) or those who live paycheck to paycheck, as they often need money immediately to pay for necessities like bills, rent, and groceries.

Cash is also the most reliable form of payment during emergencies (e.g., when card readers fail or there’s no internet connection).

#2. No Banking Fees

Banks offer financial security and various other handy features, but they can be expensive to use, and this is particularly notable in the unbanked and underbanked population. Cashing a paper check can cost anywhere from 1% to 10% of its value.

There are also various fees associated with having and using a bank account. These include monthly maintenance fees, minimum balance requirements, overdraft fees, ATM withdrawals, etc. All of them can eat into the worker’s savings and reduce their take-home pay by a significant margin.

Eliminating banks as middlemen removes these costs entirely. You get to keep 100% of your cash salary without losing anything to transaction or service fees. For workers on minimum wage, even these small percentages can amount to substantial savings over the year.

#3. Privacy and Simplicity

Cash transactions are quick, direct, and offer an exceptional level of privacy. Unlike with digital payments, there are no automatically created trails of data created and tracked by applications, banks, and even marketing professionals.

Such transactions remain private between a payer and a payee, and they are perfect for those who want financial anonymity. There’s no need to create bank accounts, download apps, memorize passwords, or give any of your private information to a third party.

Plus, there’s no need for complex payroll systems, digital processing of funds, or bank routing numbers. Some employees prefer this form of simplicity and straightforwardness in an increasingly digital and interconnected world.

#4. Tangible Budgeting

Using cash is widely recommended if you want to save money and budget better. From a psychological standpoint, spending physical cash feels “more real” than swiping a credit card. This introduces more friction and makes you analyze each purchase with more scrutiny.

Additionally, you can use “the envelope method” to physically split your earnings into envelopes for different expenses (e.g., for rent, bills, savings). Once you empty the envelope, you don’t have any more funds, so you avoid overspending.

These hard limits prevent you from overextending and going into debt, as is possible with credit cards and digital balances. If you’re repaying debt or are struggling with impulse buying, using cash and tangible budgeting can be a strong first step toward taking control over your finances.

#5. Access to Better Deals

Many small businesses, local vendors, and contractors offer discounts for cash payments. They are doing that to avoid processing fees associated with card payments, which typically range between 1.5% and 3.5% of the transaction value.

This means you save money twice, once when receiving cash and avoiding transaction fees, and the second time when you spend it and take advantage of a discount.

Some of the most common situations in which you can use the phrase “I can pay cash right now” and get a discount include buying a used car, hiring a plumber or an electrician, or even purchasing goods at a local supermarket.

Cons of Getting Paid in Cash

Now that we’ve seen the advantages of getting paid in cash, let’s take a look at some of the biggest risks and downsides.

#1. No Proof of Income

The biggest obstacle associated with getting paid in cash is having verifiable proof of income. It’s a critical financial tool required for many opportunities and by landlords when you’re looking for rent, but also by mortgage lenders, loan officers, financial institutions, and more.

They almost always ask for pay stubs, Forms W-2, or records of direct deposits to verify your income. If you’re getting paid in cash without depositing it in a bank account, and if you’re not receiving pay stubs from your employer, you have no tangible proof that creditors need. This can make it difficult to find an apartment, secure a loan, and more.

#2. Tax Risks and Legal Consequences

Cash payments can be used for tax evasion. If your employer doesn’t report the wages they give you, and you don’t report your income to the IRS, you’re committing a felony. While cash transactions are invisible to the banking system, the IRS has various sophisticated methods of tracking the flow of money and income discrepancies.

If they audit a business or employees and discover attempts to avoid paying taxes, they will fine them with significant penalties, back taxes, and interest. Moreover, since there are no contributions to Social Security and Medicare in your name, you’re not earning credits toward retirement benefits and insurance.

#3. Difficulty Tracking Income

While using cash can make budgeting easier with the envelope method, it makes tracking more challenging. When you use a bank account, you automatically get digital records that report every dollar you earn and spend. With cash, there’s no such thing.

If you don’t write down the transaction or save a receipt, the information will be gone forever. With no precise data about incoming and outgoing transactions, you’ll have a hard time controlling your finances or filing taxes. You may underestimate your earnings (and risk underpaying taxes) or overestimate your savings (and risk getting into debt).

How to Report Cash Income Properly

Properly reporting cash income ensures you comply with tax laws and regulations and secure legitimate proof of income documentation.

Here is a step-by-step guide to help with cash income reporting:

1. Determine your employment status.

• For employees (the employer fully controls when, how, and what you do, while giving you the necessary tools and resources for it), your employer must withhold taxes from your paycheck. In case they don’t do that, you may need to file Form 8919, Uncollected Social Security and Medicare Tax on Wages.
• Contractors are responsible for self-employment taxes in their entirety.

2. Track all income. Keep a dedicated spreadsheet or ledger where you will log every payment with all the dates, amounts, and reasons behind them. Whenever possible, request receipts or written confirmations from payees.

3. File Form 1040. This form is the U.S. Individual Income Tax Return form, and you report all your cash income on it. Employees will include cash wages from their Form W-2 on Line 1. Contractors will file Schedule C, Profit or Loss from Business, to report income and deduct expenses.

4. Pay self-employment tax. If you earn at least $400 in a year from self-employment, you must file Schedule SE (Form 1040) and pay Social Security and Medicare taxes on it (15.3% of your earnings).

5. Pay quarterly estimated tax. If you have self-employment income or know that taxes aren’t withheld from your paychecks, you can’t wait for the end of the year to pay them. Instead, you must make estimated quarterly payments using Form 1040-ES.

6. Maintain all records. You must keep all relevant documentation for 3–7 years. This is the timeframe during which the IRS may audit you.

How to Show Proof of Income If You’re Paid in Cash

If you need to show proof of income while you’re paid in cash, you need to be proactive about creating a paper trail. The key is to be consistent and accurate, log everything, and create the right documentation yourself.

• Bank statements are some of the most powerful proofs of income in the absence of pay stubs. If you know you’ll need verified records, you should regularly deposit your cash earnings into a bank account. Aim to perform deposits the same day or week every month, and have at least 3–6 months of records to show. This helps you show consistency that lenders want.
• Tax returns (Form 1040) are the gold standard when it comes to income verification, since these are documents you submit to the government. Keep in mind that many lenders may require you to have tax forms for at least two years.
• If you’re running your own business or work as a contractor, you can use additional documents, such as receipts, invoices, or Forms 1099 for cash income. Paystub.org can help you create detailed and professional documents using its invoice or Form 1099 generator. You can also use our pay stub generator to create these documents for yourself and enhance your budgeting efforts.

Final Thoughts

Now that you understand the pros and cons of getting paid in cash, you can choose whether to take full advantage of cash or move toward a digital/bank-oriented solution. On the one hand, you get the convenience of immediate liquidity, no fees, and privacy. On the other hand, you have to put in an effort to document everything, file taxes, and prove income.

If you stick to the cash, don’t forget to track every dollar, stay on top of your tax situation, and create your own proof of income. If you need help with documentation, you’re welcome to use any of the tools that Paystub.org offers.

Pros and Cons of Getting Paid in Cash FAQs

#1. What can happen if I don’t report my cash income?

If you don’t report your cash income, you may incur severe penalties and, in extreme cases, criminal charges and prison time. Not reporting income is considered fraud; if caught, you will have to pay penalties and unpaid taxes with interest, at a minimum.

#2. Can I ask my employer to switch from cash to direct deposit payment?

Yes, you can ask your employer to switch from cash to direct deposit payment. Keep in mind that there is no federal law that mandates they have to fulfill your request, though some state or local laws may specify otherwise.

#3. When is it better to get paid in cash?

It is better to get paid in cash if you need to spend money immediately (e.g., daily expenses or emergencies). Receiving a cash payment helps you avoid bank hold times. It’s also convenient for gig work and similar small-scale cash payment jobs where setting up payroll is impractical.