Building Your Business Operations & Success Accounting Important Facts You Need to Know About a Cash Business Accepting Payments, Paying Employees, and More By Jean Murray Jean Murray Facebook Twitter Jean Murray, MBA, Ph.D., is an experienced business writer and teacher who has been writing for The Balance on U.S. business law and taxes since 2008. She has taught accounting, business law, and business finance at business and professional schools for over 35 years, has authored several books on saving money and simplifying your business, and was the owner of startup-focused company Emence Enterprises, LLC. learn about our editorial policies Updated on September 13, 2022 Fact checked by J.R. Duren Fact checked by J.R. Duren J.R. is a terms editor at The Balance, a role in which he focuses on providing clear answers to common questions about personal finance and small business. J.R. has more than 10 years of experience reporting, writing, and editing. As an editor for The Balance, he has fact-checked, edited, and assigned hundreds of articles. learn about our editorial policies In This Article View All In This Article Accepting Cash Is Legal But Not as a Way To Avoid Taxes Cash Businesses at Non-Traditional Venues Additional Issues with Cash Accounting for Cash Transactions Paying Employees in Cash Cash Businesses and the IRS Frequently Asked Questions (FAQs) Photo: RyanJLane / Getty Images A cash business is a business that runs primarily on cash transactions. For example, restaurants take cash regularly, as do bars and other food establishments. Businesses and vendors at a flea market or farmer's market can be cash businesses, as well as businesses such as construction or trucking that pay their contractors in cash. There are benefits and drawbacks to accepting cash and paying in cash in a small business, as well as important tax considerations. Key Takeaways Whether you're accepting cash payments from customers or paying your employees in cash, the transactions need to be reported to the IRS. Accepting cash gives your business immediate payments and avoids fees, but credit-card customers tend to spend more and having a lot of cash on hand can be a security risk.Paying employees under the table—not reporting the payments to the IRS—is illegal. Accepting Cash Is Legal But Not as a Way To Avoid Taxes Accepting cash and paying in cash is legal. Making cash transactions to avoid taxes is not legal. The IRS actively pursues businesses who underreport income and who pay in cash to avoid payroll taxes and other tax reports and payments. Note Large cash transactions over $10,000 for a single transaction or two or more related transactions must be reported to the IRS via Form 8300 . Cash Businesses at Non-Traditional Venues Vendors at flea markets, craft fairs, farmers markets, street fairs, and art shows, and other outdoor and impermanent locations have traditionally accepted cash for transactions. But the advent of more portable point-of-sale (POS)machines has made it possible for even the most casual transaction to be conducted with a credit or debit card. Accepting cash in payment is becoming less necessary these days. If you do accept cash at one of these businesses, be sure to document all-cash sales. Pros and Cons of Being a Cash Business You receive payment immediately. You don't have to worry about fraud, bounced or NSF checks or bogus credit/debit cards. You don't have fees for card payments. Many people don't carry a lot of cash with them. Having a lot of cash on hand can be a security risk. Credit-card customers tend to spend more. Pros Explained You receive payment immediately. There's no waiting for a check to process or a card transaction to show up in your accountYou don't have to worry about fraud, bounced or NSF checks or bogus credit/debit cards. No need to hassle with trying to get money from those people whose payments don't clear the bank.You don't have fees for card payments, which reduce your net profit on each transaction. These fees are particularly difficult when the transaction is small. Cons Explained Many people don't carry a lot of cash with them. Younger shoppers, in particular, often carry no cash. You risk losing a sale if you don't accept their debit cards, even for a cup of coffee. Having a lot of cash on hand can be a security risk. Be sure to make daily deposits if you have a lot of cash transactions each day. Credit-card customers tend to spend more. This can increase your profits, even if you have to pay card transaction fees. Accounting for Cash Transactions Every transaction in a business must be recorded, and all income, including cash income, must be reported to the IRS and taxes must be paid on that income. If your business accepts cash in payment for goods or services, you must have some way to record that cash payment. A voucher or cash receipt pad is one type of record you could use—you should be able to find them at your local office supply store. Keeping a record of cash payments you have made is a good thing. Being able to document more expense transactions may increase your business expense deductions and lowers your business net income for tax purposes. These payments are business expenses and are deductible on your business tax return, but only if you record them. Even small payments can be captured with a petty cash system. Note Paying someone in money, goods, property or services may be a taxable transaction. For example, all barter transactions are taxable. Paying Employees in Cash Paying employees in cash is not illegal, but you must record them just like other payroll transactions. It is illegal to fail to report and pay payroll taxes. Failing to report employee Social Security income deprives these workers of benefits at retirement. Workers whose pay can't be verified are not eligible for workers' compensation or unemployment benefits. The IRS says employment taxes are owed even if employees are paid in cash. They will use available information to determine what payments are due. Note Paying employees "under the table" (paying in cash with the intent to avoid paying payroll taxes) is illegal and could result in criminal prosecution. Cash Businesses and the IRS A major problem with cash businesses is reporting income to the IRS. A cash business that reports a loss for many years can fall under IRS audit scrutiny. The IRS uses industry averages and benchmarks to seek out businesses with income that falls below these averages. IRS audits focus on the underreported income, and it is difficult to document a negative. How do you prove to the IRS that you did not take in cash in your business?. While there are some benefits for a small business to accept and pay cash, those cash transactions must be documented. In addition to the issues discussed above, selling a cash business can be difficult because the value of the customer base and payables can't be measured. Frequently Asked Questions (FAQs) What businesses are cash-only? While cash-only businesses are becoming more rare, they still exists. For example, some vendors at flea markets, craft fairs, and farmers markets may be cash-only. Can you run a cash business? Yes, you can. If you choose to run a cash business, remember that you must still report to the IRS cash payments by customers and any cash wages you pay to your employees. The information in this article and on this site is intended to be general and is not intended to be tax or legal advice. Nothing in this article should be assumed to advise business owners to evade taxes by accepting or paying in cash. Talk with your tax advisor before making any business decisions that can affect taxes or legal issues. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning! Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. IRS. "Cash Intensive Businesses Audit Techniques - Chapter 1: Introduction and Overview," Page 5. IRS. "Publication 334 Tax Guide for Small Business." Page 12. Small Business Administration. "Choose How You'll Accept Payments." Shift Credit Card Processing. "Cash vs. Credit Card Spending Statistics." IRS. "Cash Intensive Businesses Audit Techniques - Chapter 1: Introduction and Overview," Pages 5-6. IRS. "What Is Taxable and Nontaxable Income?" IRS. "IR 2004-47 IRS Warns Businesses, Individuals to Watch for Questionable Employment Tax Practices," Pages 1,3. State of California Labor Workforce Development Agency. "Paying Cash Wages 'Under the Table'," Page 2.