If you’ve ever wondered if you can pay independent contractors in cash, you’re not alone. The search query yields more than 27 million results about the intricacies of contractor payments, taxes, and proof of income. Sifting through all that information can get dizzying; that’s why we’re here to break down everything you need to know about paying 1099 independent contractors in cash.
Is paying independent contractors in cash illegal?
Paying independent contractors in cash is NOT illegal. However, it’s not a great business practice for a number of reasons. Before we get into that though, here’s a quick refresher on the differences between paying W-2 employees and 1099 contractors.
What makes paying independent contractors unique?
Paying independent contractors is not the same as paying W-2 employees. (If you’re interested, the IRS has specific guidelines on how to classify workers as W-2 or 1099—we have a whole blog on it, too!) The biggest differences are that you don’t withhold taxes from independent contractors’ paychecks. As business owners, contractors are responsible for setting aside savings to pay their own taxes either quarterly or at the end of the year. In addition, they aren’t typically provided the traditional benefits that W-2 employees are given, like health insurance, which your company would have to pay for as well.
Any independent contractor who you pay $600 or more to in a given year also requires a 1099-NEC form for tax purposes. This form helps the IRS track payments made from your business to contractors each year.
Why it’s a bad idea to pay independent contractors in cash
Because of the nuances involved with paying independent contractors, is it really a good idea to pay them in cash? While it remains legal, it probably isn’t the smartest business idea. Here are three (big) reasons why:
1. No audit trail
While it’s not illegal to pay your independent contractors in cash, it might end up being more hassle for you. That’s because if your company is audited by the IRS, you have to be able to prove that there wasn't a suspicious reason for paying your workforce in cash. Why? In the eyes of the state and federal authorities, the reason you’re choosing to pay your 1099 contractors in cash could be less-than-altruistic. You might be attempting to put off paying payroll taxes, or to help your contractors avoid their own income tax responsibilities. Another common suspicion? That you’re using cash to inaccurately report your company’s expenses in order to reduce taxable income.
Audits and investigations can be costly and come with dire consequences. Using a payments method with a built-in audit trail can help you avoid this. When you use digital disbursements, for example, you have records of all payments disbursed, which can protect your company in case of any investigation or auditing.
2. Contractors want to go cashless
Independent contractors are flocking to platforms that are able to pay them in the fastest, most reliable way possible. Results from our 2022 Gig Payments Report back this up, with 80% of workers saying they’d likely choose one gig platform over another if it could pay them instantly without fees.
Cash is inconvenient; you not only need to run to the bank to make change, but your contractors likely need to deposit that money in their bank account to pay their bills. That’s not instant—that’s a hassle. Adopting a way to pay contractors digitally—and instantly—is a game changer for companies and their contractors. Companies who don’t shift their strategy won’t be able to compete with platforms who can send instant, digital payments; if you’re wondering how to pay independent contractors in the years to come, it’s digitally.
3. Proof of income is harder to verify
When you pay your independent contractors in cash, it becomes harder for them to keep track of and verify their total income. Proof of income is needed for things like buying or renting property, leasing a car, and more. While it’s not impossible to verify income paid in cash, your contractors will have to jump through a few more hoops, like generating their own invoices and linking their bank account deposits to the corresponding invoice.
It may be hard to attract and retain the best independent contractors when you require them to do this heavy lifting themselves.
At the end of the day, you want an easy way to deliver instant, digital payments to your contractors—without your company or your contractors incurring any fees, tax headaches, or hassle. At Branch, we specialize in instant payments for contractors that are free and easy for both you and your workforce. Read more about how we’re creating seamless payments experiences for companies and contractors alike by clicking below.