If You Get Paid in Cash, Do You Have to Pay Taxes?

Receiving payment in cash for work does not exempt that income from taxation. The Internal Revenue Service (IRS) requires that all income be reported, regardless of whether it is received as cash, a check, direct deposit, or through a payment app.

Understanding Taxable Income

The IRS broadly defines gross income as “all income from whatever source derived,” making the payment method irrelevant. Money earned from freelance work, a small business, or tips is taxable and contributes to your total income for the year.

It is important to distinguish between income earned from a business activity versus a hobby. A business operates with the primary purpose of earning a profit and is conducted with continuity and regularity. While you must report income from both, only a business can deduct ordinary and necessary expenses, which can lower your overall tax burden. For a hobby, you cannot deduct related expenses.

If you are considered self-employed, you must file a tax return if your net earnings from self-employment are $400 or more. This threshold is much lower than the standard deduction amounts for employees. Even if a client does not issue a Form 1099-NEC for payments under $600, the legal responsibility to report that income remains with you.

Tracking and Documenting Cash Payments

Since cash transactions do not create an automatic paper trail, the responsibility for record-keeping falls on the recipient. You can use a logbook, spreadsheet, or accounting software to document the date, amount, customer, and a description of the service for each payment.

This detailed tracking also applies to any business-related expenses you pay for in cash. Properly documented expenses can be deducted from your gross income, which lowers your net taxable income. To claim deductions for items like supplies, tools, or business-related travel, you must maintain records such as receipts and invoices that substantiate each expense.

For individuals who receive tips, the IRS provides Form 4070A, Employee’s Daily Record of Tips, as a tool for daily tracking. Adopting a similar daily logging practice ensures that tip income is captured accurately.

Reporting Income and Paying Taxes

For self-employed individuals, reporting income primarily involves two forms: Schedule C, Profit or Loss from Business, and Schedule SE, Self-Employment Tax. Schedule C is used to report your gross income and list all deductible business expenses. The resulting net profit or loss is then carried over to your main Form 1040 tax return.

Your net profit from Schedule C is used to calculate your self-employment tax on Schedule SE. This tax covers your Social Security and Medicare contributions. The self-employment tax rate is 15.3% on your net earnings, which combines 12.4% for Social Security and 2.9% for Medicare. You may also be subject to a 0.9% Additional Medicare Tax on earnings over certain thresholds.

Because taxes are not withheld from cash payments, you are generally required to pay estimated taxes quarterly using Form 1040-ES, Estimated Tax for Individuals. The deadlines are typically:

• April 15
• June 15
• September 15
• January 15 of the following year

If a payment date falls on a weekend or holiday, the deadline moves to the next business day.

Consequences of Unreported Cash Income

Failing to report cash income can lead to significant IRS penalties and interest charges on any underpayment. The primary penalties include:

• A failure-to-file penalty of 5% of the unpaid taxes for each month a return is late, up to 25%.
• A failure-to-pay penalty of 0.5% of the unpaid taxes per month, also capped at 25%.
• An accuracy-related penalty of 20% if you substantially understate your income tax.
• A civil fraud penalty of 75% of the underpayment if the IRS finds evidence of fraud.

If you file your return more than 60 days late, the minimum penalty is the lesser of $525 or 100% of the tax owed. Not reporting all income also increases the likelihood of an IRS audit.

If the IRS determines the failure to pay was willful tax evasion, the consequences can escalate to criminal charges. These may result in fines of up to $250,000 for an individual, up to five years in prison, or both.