Many employers compensate employees via check or direct deposit format, but some opt for cash payment instead. It is not against the law to pay an employee in cash, provided specific legal conditions are met. Whether you should receive a W-2 depends on whether you got paid as an employee or as an independent contractor.
If you were paid in cash and didn’t receive a W-2, there are two likely reasons for this: you performed services as an independent contractor and should not receive a W-2, or you’re an employee but your employer did not take taxes out of your cash payment. To determine which case applies to you, determine whether you have an employee or contractual relationship with the person who paid you. Also, certain forms of cash payments are not taxable, such as payroll draws and travel reimbursement, as they are not considered wages.
Employee vs. Contractor
According to the Internal Revenue Service, you’re an employee if your employer can control the type of work that will be performed and how it will be done. You’re an independent contractor if you’re a business owner or contractor who renders services to other businesses. As a cash-paid employee, you’re required to fill out a W-4 form upon being hired; this helps your employer determine the amount of federal income tax to take out of your pay. He must also take out Social Security and Medicare taxes at flat percentages of your pay. In many states, an employer is required to give cash-paid workers a wage statement that shows their deductions each time they're paid. As an independent contractor, you’re responsible for paying your own taxes, so no taxes would be taken out of your cash payment.
W-2 vs. 1099
If you’re a cash-paid employee, your employer is supposed to give you a W-2 by the end of January, showing your wages earned and taxes paid for the previous year. She files the W-2 with the Social Security Administration, and, if applicable, with state and local revenue agencies. The IRS also requires your employer to file reports, typically quarterly, showing wages and taxes paid for the reporting period. She’s supposed to send in your tax payments to the respective agency based on their mandated time frames. If you’re an independent contractor who earned $600 or more for the year, the person you performed services for is supposed to give you a Form 1099-MISC by the end of January. She should also file the form with the IRS.
If you’re due a W-2 but didn’t get one, contact your employer and promptly request one; same idea if you are an independent contractor but didn’t receive a 1099 form. Regardless of whether you received your W-2 or 1099, the revenue agency still expects you file your tax return. If you’re having trouble receiving your W-2 or 1099, contact the agency for its procedures for filing your tax return without the form.
If your employer did not take taxes out of your wage cash payments, it’s possible he’s trying to escape his tax obligations by paying you “under the table.” Specifically, the lack of paper trail makes it easier for him not to report those wages and pay his contributions on the withholding. The IRS takes this matter seriously and encourages employees to report employers who fail to withhold and pay taxes. Such employers can face civil and criminal penalties.
- IRS.gov: Employer and Employee Responsibilities - Employment Tax Enforcement
- IRS.gov: Independent Contractor (Self-Employed) or Employee?
- IRS.gov: Form 1099-MISC and Independent Contractors
- IRS.gov: IRS Warns Businesses, Individuals to Watch for Questionable Employment Tax Practices
- Oregon State University: Non-Wage Cash Payments Made to Employees