Paying Workers in Cash? How to Move to Proper Payroll

Many small business owners start by paying helpers in cash because it feels simple. The way you pay a worker does not change whether that worker is an employee. If a worker is an employee, you generally have withholding, deposit, and filing duties, whether you pay in cash, by check, or by transfer.

Step 1: Decide who is an employee

Use the IRS test described in contractor vs. employee. The IRS looks at behavioral control, financial control, and the relationship of the parties.

Step 2: Talk to a professional about past periods

If you have paid employees in cash without payroll in the past, speak with a tax professional before you do anything else. The IRS has had programs that allow some employers to correct past worker classification, and eligibility and terms change. A professional can tell you what applies to your situation. Do not guess, and do not ignore the issue.

Step 3: Set up payroll going forward

Get an EIN if you do not have one (how to apply).
Collect a Form W-4 and Form I-9 from each employee.
Choose a payroll provider or an accountant to run payroll.
Register with your state for payroll taxes and unemployment insurance.
Withhold taxes each payday, deposit them on time, and file your returns. See payroll tax deposits.
Give each employee a Form W-2 after year end.

Step 4: Talk to your workers

Explain the change. Employees will see tax withholding on their pay stubs, so their take-home pay will look different. The upside is a pay record they can use to rent an apartment, apply for a loan, or file their own taxes.

Step 5: Keep records

Keep a record of every payment, even small ones. See what to scan and keep.

A note on the cost

Payroll adds costs, including the employer share of Social Security and Medicare tax and state unemployment taxes. Budget for them. In many cases, running payroll correctly costs less than the penalties and back taxes that can follow an audit.

Ready to switch? Book a call with FlowTex.

Sources

This article is general information, not tax or legal advice. If you have past unreported payroll, talk to a qualified professional before you act.