I hear this question at least once a month: “Can I just pay my guys in cash?”
Sometimes it’s followed by, “What about gift cards? Easier than dealing with payroll, right?”

I get the appeal. Cash feels simple — no paperwork, no payroll fees, no waiting for checks to clear. Hand over some bills on Friday, everyone goes home happy.

But here’s the thing: this question has two answers. There’s the legal answer — what the law actually says. And then there’s the practical answer — what can go wrong even if you think you’re doing it right. Let’s look at both.

The Legal Answer

Cash Payments

Paying in cash isn’t automatically illegal. Federal law allows you to pay wages in “cash or negotiable instrument.” So yes, technically, you can hand someone $800 on payday.

But — and this is a big but — you still have to comply with every other employment law. That means:

Withholding federal and state income taxes
Paying Social Security and Medicare (both employee and employer portions)
Filing quarterly payroll tax returns
Keeping records of hours worked and wages paid
Issuing W-2s at year-end
Following minimum wage and overtime rules

In other words, paying in cash doesn’t exempt you from running actual payroll. You’re just swapping the payment method.

Gift Cards

Gift cards are a different story. They’re generally not legal for regular wages under federal law because they’re not “negotiable instruments” — you can’t cash them anywhere at face value. The IRS also treats gift cards as taxable income, meaning you still have to withhold taxes and report them. Some states explicitly ban paying wages in gift cards.

Even for bonuses, consult your accountant first. It’s complicated and easy to get wrong.

Bottom line on the law: cash can be legal if you do everything else right. Gift cards are a minefield. (Also, this is general advice; if you need specific legal advice, consult your attorney.)

The Practical Reality: Why This Is Still a Bad Idea

Even if you technically stay within the rules, paying cash creates a pile of real-world problems. Here are five reasons this can blow up on you.

1. You Have No Protection in Disputes

An employee says you shorted him 10 hours last week. Or claims you never paid him at all. Where’s your proof?

If you’re handing out cash with no pay stubs, no signed receipts, no records — it’s your word against theirs. In a wage dispute, the burden of proof is on you as the employer. No documentation? You lose.

2. It’s a Tax Nightmare

The IRS doesn’t care how you pay your crew — they expect full documentation and proper withholding. No paper trail means a failed audit.

If you can’t document wages, you can’t deduct them as a business expense. That means you’re paying your workers and getting no tax benefit — plus you still owe the employer’s share of payroll taxes.

3. Insurance Problems Multiply Fast

Your insurance depends on your payroll records.

Workers’ comp audits are based on reported payroll. If you’ve been paying in cash but don’t have clear documentation, the auditor may assume you underreported — and hit you with retroactive premiums and penalties. And those retroactive premiums? We’ve seen contractors hit with $15,000–$30,000 adjustments after an audit.
General liability insurers look at payroll too. If an employee gets hurt and you can’t show they were properly documented and paid, your claim might be denied.

Paying in cash isn’t automatically “under the table,” but without records, it can look that way — and that’s what gets you in trouble.

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4. It Makes You Look Terrible

Cash payroll might seem like no big deal — until you try to borrow money, get bonded, or sell your business.

Banks and buyers see it as a red flag for underreported income. Even your good employees will start wondering what else you’re cutting corners on. It hurts your reputation far more than it saves you in hassle.

5. You’re Inviting Misclassification Problems

Paying cash often goes hand-in-hand with calling workers “1099 contractors” when they’re really employees. That’s a legal landmine.

If you tell them when to show up, what to do, and how to do it — they’re W-2 employees. Misclassification penalties are brutal: back taxes, fines, and potential criminal charges. The Department of Labor is cracking down hard on this, especially in construction.

The Better Way

Here’s the good news: doing it right doesn’t have to be complicated.

Set up proper payroll. Use a service like Gusto, QuickBooks Payroll, or ADP. Even for small crews, they’re affordable and handle withholding, tax filings, and record-keeping automatically. Pay by check or direct deposit — that creates an instant paper trail. Keep time records. Stay compliant with withholding.

This protects you just as much as it protects your employees.

If you’re hiring someone for a one-off project, use a 1099 — but only if they truly meet the legal test for independent contractors. That means they control how the work gets done, use their own tools, and operate as an independent business. If you’re setting their schedule and supplying materials, they’re employees.

What if You Absolutely Have to Pay Cash?

Sometimes it happens — a short-term cleanup, a last-minute day laborer. If you have no other option, protect yourself:

Document it in writing.
Have the worker sign a receipt (name, date, amount, description of work).
Record it in your accounting system that same day.
Report and pay the taxes anyway.

It’s more work, but it keeps you covered.

Bottom Line

Paying in cash or gift cards might feel easy, but it creates far more risk than it saves. You don’t need to be paranoid — just disciplined.

Make every payment to your crew something you’d be proud to show your accountant. It’s the simplest way to stay off the IRS radar, keep your insurance airtight, and run a business that can grow, borrow, or sell someday.

Because when it comes to payroll, doing it right isn’t just about compliance — it’s about protecting the business you’re building.

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