How To Pay Employees With Cash In Quickbooks – Best Way To Protect Your Business

Sometimes businesses need to pay their employees with cash, verses issuing a paper paycheck. There are a couple reasons the business may want or need to do this: The business is having cash flow problems, and paying employees from cash is easier to manage. The employee may not have a bank account. Cashing a paycheck…

Sometimes businesses need to pay their employees with cash, verses issuing a paper paycheck. There are a couple reasons the business may want or need to do this:

  • The business is having cash flow problems, and paying employees from cash is easier to manage.
  • The employee may not have a bank account. Cashing a paycheck is difficult and / or expensive, and direct deposit is not an option.

Businesses should never simply hand employees cash for work performed. There must some type of paper trail to prove:

  • in what manner the employee received the funds
  • when the employee received the funds
  • how the gross pay was computed
  • what employment taxes were withheld from the pay; gross pay vs. net pay.

Every single one of these is a potential issue that could arise in the event that the employee disputes the pay, or in the event of a employment tax or work comp audit.

Here is how to pay employees with cash, while still protecting the business from potential problems:

1. The business must be set up with some type of payroll service. Either QuickBooks must be enabled to perform payroll, or an outside service should be used. Either way does not matter, but somehow payroll taxes, etc., must be computed correctly.

2. Generate a paycheck in the normal way, using the checking account to draw from, or a special checking account for payroll, if you have one.

3. Have the employees endorse the checks – he / she is signing it over to you.

4. Pay the employees cash. It must be the exact amount on the checks, to the penny. No fudging here! This is important, because the cash paid out must reconcile to the check amounts. If the amounts are not exact, it will be difficult to reconcile them.

5. Take the checks to the bank and deposit them back into the checking account. Do not void them in the software. Although voiding them have the same net effect on the bank balance, the accounting software can not compute the gross pay and pay taxes correctly if they are voided.

Another alternative is to simply create “dummy” checks on blank paper. Make sure the employees put their signatures on them. Pay with cash, to the penny.

The employee's signature on the paycheck or “dummy” check is crucial – this way, the employee can not claim he / she was not paid.

Following this method, you are simply cashing the employee's paychecks for them. This leaves a very good paper trail for your accountant or auditor to follow. Everything is clean, above-board, and easy to understand.

My thanks goes to Suzanne Mead, Certified QuickBooks ProAdvisor over at http://forums.quickbooksusers.com/index.php , for this excellent tip. Thank you Suzanne!