What is a Cash Salary? How to Report it + Pros & Cons
October 31, 2023
Cash salary means paying employees in, well, tangible money. In this day and age, it is more common for employers to pay their staff through direct deposit or even through mobile and online cash applications.
Still, there are more than a handful of industries that continue to compensate employees and workers with spendable cash. It begs the question of whether getting paid in cash is beneficial for employees or if it is only advantageous for employers.
Keep reading if you’re keen to learn more about how cash salary works, from its pros and cons to the different ways that workers can report cash-based compensation.
- Cash salaries are a type of compensation given to employees wherein the payment takes the form of spendable cash or money.
- The benefits of receiving a cash salary include instant compensation, higher pay, flexible work hours, and convenience in purchasing basic necessities.
- On the other hand, workers paid in cash may find it challenging to maintain proof of their income, track their taxes, qualify for benefits, and budget their money wisely.
What Are Cash Salaries?
Cash salaries are compensation paid to employees, part-time workers, or contractors in spendable or disposable money. Workers who are paid in cash are either paid hourly, daily, or weekly.
Cash payment is typically ideal for one-time payments or services hired by businesses only as needed, such as housekeeping, repair, and maintenance.
Salaries paid in cash are also typical in the restaurant and hospitality industries, as well as in the construction and sales industries.
Employers who want to pay their employees in spendable money must first adhere to specific legal conditions, including the acknowledgment of their workers’ labor rights.
Employers must also allow their employees the freedom to apply for benefits and insurance premiums and ensure they assist their workers in filing their taxes.
How do Cash Salaries Work?
Employees who compensate their workers in cash usually do not use payroll software or online payment gateways to send their income.
Although not the most ideal form of salary or wage, paying employees in cash is legal.
In private industries, cash-based salaries comprise over 70% of the total operating costs that employers account for on a regular basis.
Employers assess the amount of cash wages paid to employees by observing the current trends in the labor market and matching the competitive offers of other companies.
This is especially true if employers are seeking to hire employees for a job that requires extensive work experience and an advanced skill set.
Cash Wage vs. Minimum Wage
For minimum-wage workers and employees who are paid hourly, the cash wage is synonymous with their minimum earnings.
Under this circumstance, the compensation given to minimum-wage earners represents the majority of their earnings in total. This means their employer does not offer to enroll their workers to qualify for specific benefits such as health and retirement insurance.
Cash Salaries Example in the US
Below are some statistics that provide more information and examples of cash-salary jobs across the United States:
- On average, an employee who is paid in cash in the US earns approximately $45.2 per hour. That’s $1,745 per week or $7,563 per month.
- Some of the top locations in the US that give the highest amount of cash salary are Delaware, Petaluma, Brainerd, Auburn, and Johnson City.
- Presently, among the most rewarding cash jobs in the US include working as a dog walker or pet sitter, babysitting, driving an Uber or Lyft, landscaping, renting spaces (as in Airbnb), cleaning jobs, personal trainers, and working as someone’s personal assistant.
4 Benefits of Receiving a Cash Salary
Now that you know the definition of a cash salary, it’s time to learn about the benefits of being compensated in cash.
#1. You Receive a Higher Income
Most of the time, particularly for cash salaries paid to independent contractors, project-based services, or one-time services, workers receive their income in full. In other words, taxes and deductions are not withheld from the gross pay.
This can prove beneficial and balanced if you make a living mainly through project-based or short-term work setups. While work may not be as constant as a regular, office-based job, the fact that you receive your gross earnings in full makes up for the occasional job opportunities.
#2. You Get Paid Instantly
Earning a cash salary slip also means getting paid instantly. You don’t need to wait until the next payday to receive your cash wage. In most cases, you get paid as soon as you complete the job that you were hired to do.
This setup is quite convenient because you can easily count your money and verify that you are compensated accordingly.
#3. You Can Prepare for Emergencies
It is easier to pay for goods and purchase other basic necessities such as medicine, food, clothing, rent, and personal care when you are paid a cash salary.
You no longer have to look for an ATM or a bank to get cash. Also, online payment gateways for money transfers are prone to system errors and untimely maintenance. At times, wire transfers take even longer if your employer is sending your payment overseas.
#4. You Work on a Flexible Schedule
Since the type of work that entails cash wages is either one-time jobs, short-term projects, or services that are only hired as needed, you are not constrained by the usual 9-to-5 work arrangement that you would normally have to follow if you work in an office.
Flexible work schedules mean you have more time to focus on your family, hobbies, interests, and other important aspects of your life.
4 Drawbacks of Receiving a Cash Salary
There are also specific disadvantages or drawbacks associated with receiving a cash salary.
#1. You Don’t Qualify For Benefits
Cash wages are not always documented or reported to the government, thereby diminishing your chances to qualify for healthcare and retirement benefits.
You need pay stubs or paycheck records to show proof that you are consistently contributing to life, healthcare, and retirement insurance benefits. Otherwise, you may have to apply for these benefits, keep a portion of your earnings every payday, and manually pay your contributions.
#2. You Have Fewer Opportunities for Promotion
Most salary-cash-paid jobs are inconsistent in terms of how frequently employers and clients hire them. For instance, gardening and maintenance services are only hired as needed and compensated in a one-time arrangement.
There are hardly enough performance metrics to use as the basis for promoting you to a managerial or supervisory position. From the employer’s perspective, it is also not reasonable to promote a worker who is only hired to do occasional work.
#3. Tracking Your Taxes & Financial Documents is Tedious
Receiving cash wages also poses the problem of not having proof of income and proper documentation for your taxes.
You need proof of income when applying for loans, securing a mortgage, or looking for an apartment to rent. You must also keep a close eye on your tax liabilities and possible qualifications for specific tax credits.
#4. You May Lose Your Earnings More Easily
It can be quite tempting to spend a cash salary once you already have it on hand. If you are someone who is not good at following a budget, you may struggle not to spend all of your money in such a short time.
In contrast, salaries deposited into your bank account are easier to manage because you can only withdraw the exact amount you need and save the rest for a rainy day.
How to Report Your Cash Wages
There are practicable ways to report your cash wages, and it is important to know these methods to avoid getting penalized by the IRS. Remember, you are obligated to report your income to the IRS, whether you are compensated in cash or not.
You can do the following:
- Create a paper trail for your cash salary. Use an online pay stub generator to create your pay stubs each time you receive payment or tips from your employer or customers. You can also deposit your cash salary, create a spreadsheet, or print receipts to create a paper trail of all the cash wages you’ve received. You can use these records as a reference in calculating your taxes and filing your returns during tax season.
- Use a 1099 form. You can use a 1099-NEC to report your cash income if you are an independent contractor or a freelancer. In this case, your client will furnish Form 1099-NEC for you and send you a copy of the form so you can file your taxes. You can also use the IRS Form 1099-MISC if you received at least $600 in payments within the year for your services.
- Confer with your employer. If you are employed by a company, then it is your employer’s job to withhold a portion of your cash salary to pay your taxes. Ask your employer about the steps they take to withhold federal and state income taxes from your salary.
Who Benefits More From Cash Salaries: Employee or Employer?
Initially, it would seem as though employees benefit more from cash salaries than employers do, but it depends on the perspective. Indeed, it is more convenient for most employees to receive their salary in cash because they can immediately spend their hard-earned money to purchase their basic necessities and pay their bills.
If their employer does not deduct a percentage of their pay for their taxes, workers will likely receive their gross pay in full.
The harsh reality is that not all employees paid in cash wages are fortunate enough to receive their gross earnings in full or get offered benefits in the form of insurance premiums or healthcare assistance.
On the other hand, employers who pay ‘under the table’ compensation can get away with not preparing or withholding income taxes.
Similarly, if employers are paying 1099 workers or independent contractors, they do not have to routinely calculate the taxes owed by the contractors they hired. All they have to do is furnish the contractor’s copy of the 1099-NEC.
The only instance where employers are required to withhold income taxes and record all deductions applied to the cash earnings of all workers is if the latter are included in the employer’s payroll. Failure to do so may lead to an IRS audit.
In the end, it is the employees who are at a bigger disadvantage than employers because they are not guaranteed full payment at all times, and they are also deprived of benefits that, ideally, should be readily offered to all workers.
Employers only have to worry about dispensing the payment. If they want to save themselves the trouble of preparing income and payroll taxes or assist workers in monitoring their benefits, employers have multiple options to legally skip all the paperwork.
Getting compensated in the form of a cash salary comes with its perks and drawbacks.
The secret to ensuring employee expectations and rights are duly met when paying them in cash is to have a sound agreement on the conditions and limitations of the job and salary offer.
Cash Salary FAQ
#1. Is it legal for employers to pay employees’ salary as cash in hand?
Yes, it is legal for employers to pay employees’ salaries as cash in hand.
On the contrary, it is not an ideal way to compensate employees, considering the need to document all payments sent to employees in exchange for their work, including all deductions for taxes and voluntary contributions.
#2. What is it called when you’re paid in cash?
When you are paid in cash, your compensation is simply called ‘cash salary’ or ‘cash wage.’ However, you might find that other people may refer to cash-based compensation as ‘under the table,’ especially if your employer does not withhold payroll taxes from your pay.
#3. How can I prove my income if I get paid in cash?
If you are paid in cash, you can prove your income by generating your own pay stubs, creating a spreadsheet to record your compensation, depositing your earnings into your bank account, or requesting aproof of income letter from your employer.
#4. Can I ask for pay stubs if I’m paid in cash?
Yes, you can. But before you request pay stubs from your employer, you must check the pay stub requirements in the state or location where your work is located.
#5. Why do companies pay employees in cash?
Some companies pay employees in cash due to their business size and the nature of their work. Examples of industries where companies typically compensate employees in cash are construction, gardening, landscaping, and housekeeping.
#6. Do I have to pay taxes if I get paid in cash?
Yes, you have to pay taxes even if you are paid in cash. Paying federal and state income taxes is a must, regardless of whether you are paid in cash, via direct deposit, or through bank checks.
#7. Are employers obliged to pay income taxes if they pay employees in cash?
Yes, employers are obliged to pay income taxes if they pay employees in cash—as long as the individual paid in cash is included in the employer’s payroll. Determining the income taxes to withhold from the employee’s cash salary will depend on their filing status and tax bracket.