Should I pay my employees or contractors or vendors in cash?
No. Do not pay people in cash. Paying in cash creates a number of headaches, legally and taxwise.
First, there is the issue of documenting the payment. With cash it can be hard or impossible to document who you paid, when you paid and what you paid that person for. Without the evidence of payment, someone may claim that they were not paid. Seriously, as an attorney, Nick Heimlich has dealt with many clients and potential clients who have legal disputes because someone paid in cash. Unfortunately, there are people who are dishonest who were paid and will claim that they were not paid.
Second, if the payment is in cash, you may not even have a receipt for the payment. Then it may be hard to claim the payment as a business expense if you are a business, or for other tax deduction expenses.
Third, with respect to paying employees in cash there is a whole host of issues. Employees are required to have paycheck statements or stubs which show all proper withholdings. Those withholdings from the wages include federal income taxes, social security taxes, medicare taxes, California unemployment taxes, California state income taxes, possibly wage garnishments, employee benefits, retirement contributions. If an employer pays in cash, in our firm’s experience, that employer often forgets about all these other tax withholdings and providing a proper paycheck statement. Not paying state and federal taxes exposes the employer to potential civil and criminal liabilities and is not optional.
Fourth, with respect to California Employees, they are required to be provided a paycheck stub or statement that has various items in it. Under the California Labor Code Section 226, the paycheck shall contain an itemized statement in writing showing “(1) gross wages earned, (2) total hours worked by the employee, except as provided in subdivision (j), (3) the number of piece-rate units earned and any applicable piece rate if the employee is paid on a piece-rate basis, (4) all deductions, provided that all deductions made on written orders of the employee may be aggregated and shown as one item, (5) net wages earned, (6) the inclusive dates of the period for which the employee is paid, (7) the name of the employee and only the last four digits of his or her social security number or an employee identification number other than a social security number, (8) the name and address of the legal entity that is the employer and, if the employer is a farm labor contractor, as defined in subdivision (b) of Section 1682, the name and address of the legal entity that secured the services of the employer, and (9) all applicable hourly rates in effect during the pay period and the corresponding number of hours worked at each hourly rate by the employee” The full text of Labor Code Section 226 has additional information.
What if an employee or vendor says they want to be paid in cash?
It does not matter what they say, don’t do it. If you pay someone in cash, even at their request, it does not fix the problem of them claiming later they were not paid or the failure to document things for tax purposes.
What if my employee says that they want to be paid cash to keep their benefits (some Government benefit or welfare program) or healthcare benefit?
Do not pay in cash because this may mean that you are helping the employee lie about their income so they can get government benefits. It is possible that the government agency could have issues with your not properly documenting pay to your employee. This might subject you (as the Employer) to civil or criminal issues from whatever agency is issuing that government benefit.
What if my employee says they don’t have their documents handy or refuse to provide them but demand their cash payment anyway?
You should not hire anyone who does not have the documentation for properly identifying themselves and running payroll to begin with. However, if you started to hire them, stop them from working any more and send them home until you have documentation to issue proper payroll.
As the Employer what do I need to setup to run payroll?
You need to setup your business, including have an employer identification number (EIN) from the IRS, and any state/local tax ID number, State Unemployment ID number, employee addresses and social security numbers, complete an I-9 for each employee, and a W4 for each employee and set up worker’s compensation insurance. There are a number of companies that will help you with running the payroll and calculating the amounts. As a law firm, I have personally used Intuit for payroll before. I also know many clients who have used ADP or Paychex. These services are very helpful, but you must also make sure to follow all the rules and provide them with the correct information. Also, get each employee to either sign the offer letter or specify the compensation offered and exactly what benefits are offered and which are not offered.
Do I have to offer a retirement plan?
In California, as of 2022, every employer with 5 or more California based employees (whether full time or part time) must offer a qualified retirement plan. As of December 31, 2025, all businesses with 1 or more employee will have to offer a retirement plan. For more information, see California Employment Development Department (EDD), see link here, CalSavers Retirement Savings Program You can also use the CalSavers plan, CalSavers | Employer Information. You don’t have to use CalSavers if you already have a retirement plan, such as thru private retirement companies, such as www.vanguard.com or www.fidelity.com or www.tdameritrade.com While my law office does not endorse any of these particular companies, I have used Vanguard, Fidelity and TD Ameritrade myself and been satisfied with their services.
In summary, do not pay people in cash unless you wish to have problems with tax authorities or people claiming that they were not paid.
