Drawbacks of Cash Payments. While paying employees with cash can offer certain conveniences, it also presents significant challenges. These include difficulties in maintaining accurate records, ensuring tax compliance, and mitigating security risks associated with cash transactions.
The Convenience Factor
One of the primary reasons someone might choose this payment method is the simplicity and immediacy it offers. Unlike digital transactions, physical currency exchanges are often instant and don't require the intervention of banks or other financial institutions.
Paying with cash can help individuals manage their budgets and spend more effectively. When using cash, people are limited to only spending only the amount of money they physically have on hand. This reduces the risk of overspending.
Remember that all income, no matter the amount, is taxable unless the law says otherwise – even if you don't get a Form 1099-K. If you get money from someone as a gift, reimbursement or repayment of other personal expenses, that money is not taxable.
Contrary to some misconceptions, all income — even if it's paid in cash — is subject to taxation. Failing to report cash income can result in severe consequences, including penalties from the IRS and potential jail time for committing tax fraud.
The IRS actively pursues businesses who under report income and who pay in cash to avoid income taxes. Businesses such as restaurants, hair and nail salons, food truck vendors and other independent trades that have a higher number of cash transactions are also more likely to be the target of an IRS audit.
Cash compensation may be preferred by employees because by its nature money is flexible and fungible. An employee receiving cash can exchange the cash they receive for whatever non-cash goods and services they want, provided they are available on the market.
Protect yourself with proof of payment
When you buy products or pay bills with cash, it's important to get proof of payment. For most purchases, a sales receipt serves as proof of payment for a specific service or product.
Even though you're paid in cash, you still need to pay Social Security and Medicare taxes. If you are an employee, your Social Security and Medicare taxes should have been withheld from your payments. This is referred to as FICA.
Paying with paper money can encourage mindful spending and budgeting habits, but cash lacks the convenience of credit cards, like making purchases online. Credit cards have greater security than cash and may give cash back rewards.
"We would recommend between $100 to $300 of cash in your wallet, but also having a reserve of $1,000 or so in a safe at home," Anderson says. Depending on your spending habits, a couple hundred dollars may be more than enough for your daily expenses or not enough.
The price differences are a result of one thing: fees. Merchants have to pay fees to Visa and Mastercard when someone pays with a card, according to the National Merchants Association. And gas stations or restaurants, for instance, can pass that fee on to you.
Since cash-working employees do not receive benefits like medical insurance or retirement plans, they must pay for these expenses independently. Hence, employees cannot save money for emergencies or retirement because their paychecks are already being used to pay bills, buy food, and meet other financial obligations.
Cash payments pose risks such as theft and loss, as physical currency can be easily stolen or misplaced. Additionally, there's a higher likelihood of human error in counting and handling cash, leading to discrepancies in financial records.
To many economists and policymakers, cash is a problem: cash transactions are harder to tax, it can be used by criminals, and those who keep their savings in it miss out on interest.
Section 269ST restricts a person (recipient) from receiving an amount of Rs. 2 lakhs or more otherwise than by an account payee cheque or account payee bank draft or use of an electronic clearing system through a bank account or other prescribed electronic modes.
As an employee, getting paid in check is better for you as it leaves a transaction trail. But if you prefer to get paid in cash, that's okay as long as your employer pays the right amount of taxes and covers insurance premiums for workers' compensation insurance.
For people who want tighter control over their budget and a more tangible sense of their spending, using cash might be a better option.
YOU ARE ALLOWED TO CARRY AS MUCH CASH AS YOU WANT OUT OF AND INTO THE UNITED STATES. To summarize up front: no, you are not restricted to traveling with sums of $10,000 or less.
Cash payments of $600 or more to an independent contractor should be reported on a 1099 form, regardless of the payment method. Neglecting to issue the appropriate tax forms for cash payments can lead to tax implications and penalties.
You can deposit up to $10,000 cash before reporting it to the IRS. Lump sum or incremental deposits of more than $10,000 must be reported. Banks must report cash deposits of more than $10,000. Banks may also choose to report suspicious transactions like frequent large cash deposits.