Paid in cash: how do taxes work?

Two very different situations

Paid in cash with withholding: your employer withholds taxes, gives you a pay stub and a W-2 in January. It is the same as being paid by check.

Paid the full amount with nothing withheld: nobody has paid tax on that money. When you file, you owe income tax and, depending on how you are classified, Social Security and Medicare too.

How much to set aside

At $22 an hour and 80 hours you would receive the full $1,760.00. For reference, an employee on the same pay would have $261.99 withheld in a state with no income tax.

Many people set aside 15% to 20% of each payment in a separate account. It is not a calculation of what you owe: it is a savings goal so you do not face the whole bill in April.

What to keep

Write down every payment: date, amount and who paid you.

Keep messages, receipts or any record of the hours you worked.

Ask for a pay stub. In many states the employer is required to give you one.

Filing without a W-2

You can report your income even without a W-2 or a 1099. You do not need a Social Security number to file: the IRS issues an ITIN to people who cannot get one.

Every case is different. A tax preparer or a free VITA clinic can help you do it right.

Frequently asked questions

Official sources

• IRS, Independent contractor (self-employed) or employee?
• IRS, Self-employment tax (Social Security and Medicare taxes)
• IRS, Tax Withholding Estimator