Running a cash-only business means you strictly accept cash payments and pay in cash, leaving out a credit card and electronic payments. Although it might seem like a way to cut back on time and eliminate credit card fees, cash businesses can quickly come under IRS scrutiny for underreporting income and taxes.
Because there isn’t a paper trail with cash transactions, it’s essential that you make one. Learn how accounting software can help keep your cash-only business legal.
What is a cash-only business?
Businesses have different expenses, like vendor purchases and payments to employees and contract workers. If you run a cash-only business, you make all these payments in cash, eliminating the need for credit cards, direct deposit, and other electronic payments.
Cash-only businesses also only accept cash payments from customers. This means you don’t need to foot the bill for credit card fees. And, you receive payments immediately when customers pay in cash.
Some businesses prefer only working with cash. Everyday cash-only businesses include street vendors, coffee houses, restaurants, and other small mom-and-pop shops.
Are cash-only businesses legal?
Cash-only businesses are legal. However, you need to adhere to the same responsibilities of other businesses:
- Withholding payroll taxes from employee wages
- Keep accurate records
- Report income and expenses to the government
Running a cash business can be difficult because of the many tax responsibilities you have. Having a lack of records and forgetting to take out taxes from employee wages are just a couple ways you could land in hot water with the IRS.
The IRS also has special requirements of certain cash payments. If a customer pays over $10,000 in cash in one transaction or two or more related transactions, you must fill out Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.
Despite being legal, the Small Business Administration reports that running a cash business can be an IRS audit red flag. And according to the IRS, cash businesses underreport cash payments from customers by pocketing money without recording it.
Omitting income is one method of cash-only business tax evasion. If you don’t report all the money your business earns, there will be less income for the IRS to tax. This translates to you skimping out on taxes, otherwise known as tax evasion or fraud.
Running a cash-only business and not keeping clear records can also hurt your business’s bottom line. Not knowing your exact income and expenses jeopardizes your ability to create financial statements and budgets and decreases your chance of obtaining investments and loans.
Can accounting software help keep your cash-only business legal?
You can’t refer to direct deposit summaries and credit card statements when you only accept and distribute cash. However, you could simplify your cash-only business responsibilities through accounting software.
Software is helpful for any business, whether you accept/pay with cash, credit, or both. An easy-to-use accounting software promotes the organization and helps you create a paper trail. After recording transactions in your POS system, create a record in your accounting software.
Here are a few ways accounting software can help you keep your cash-only business legal. With accounting software, you can:
1. Record transactions in one location
Let’s talk about accepting cash payments from customers first. You might count the amount of money in your cash register at the beginning and end of a day, but where do those records go? Having disorganized records won’t help you if you’re putting together your business tax return or scrambling to prepare for an IRS audit. You need to know precisely how much income your business brings in.
When you make payments, you might receive receipts or another verification of payment. But, keeping a shoebox full of crumpled receipts isn’t ideal. Claiming deductions for business expenses isn’t feasible when you don’t know how much you spend. You need a method of keeping your transaction data all in one safe space.
Accounting software makes it easy to track your income and expenses, record payments, and create reports for the money you owe or is owed to you. As soon as you make a payment, enter the amount and vendor in your accounting software. When you receive a cash payment, enter the information into your software.
Like any business, a cash-only company needs to be ready to back up the income it reports on tax forms. You can’t estimate how much income you receive and the number of expenses you have. With software, you avoid losing or damaging physical copies of records. That way, you know exactly how much your business has brought in and spent.
2. Report 1099 payments
Cash-only businesses can also get into trouble if they don’t report payments made to independent contractors. If you fail to report payments, you will be penalized and owe compensation to the IRS.
When you hire independent contractors to do work at your small business, you must report nonemployee compensation over $600 on Form 1099-MISC, Miscellaneous Income.
If you have an independent contractor working for you, you don’t withhold taxes from their wages as you do with employees. Instead, they are required to pay self-employment taxes. The IRS needs to know how much the contractor earned to verify the amount of taxes they owe.
You must fill out how much you paid to each independent contractor on Form 1099-MISC. Then, you send the form to the contractor, the IRS, and the state tax department (if applicable). You also keep a copy for your records.
Because paying in cash eliminates a paper trail, remembering to file Form 1099-MISC can slip your mind. But, it is a necessary part of hiring independent contractors and running a legal business. So, how can accounting software help a cash-based business avoid penalties?
Accounting software’s ability to record payments lets you create entries for each contractor you pay. Additionally, many accounting software systems come with 1099 features. These features allow you create 1099 reports, which shows you how much you paid each contractor. You can use this information to create Forms 1099-MISC and send to the appropriate parties. Many accounting software programs also come with a feature that lets you create and print these forms.
3. Integrate it with payroll software
If you have employees, you need to withhold taxes from their wages before paying them. And, you need to remit these taxes to the government. When you pay employees with cash, you are still responsible for doing this. And, you must record their gross (before tax) and net (after tax) wages, along with the amount you withheld for taxes.
While accounting software records your business income and expenses, it doesn’t pay employees or withhold taxes from their wages. To run payroll, you need payroll software. The software’s calculations show you how much to withhold, and it creates a record, so you know your year-to-date payroll. Instead of paying via direct deposit or printing checks, you can then use the information to give employees cash.
Payroll expenses are one of the most significant costs for businesses with employees. To keep track of these expenses, you must record payroll expenses in your accounting books. Your payroll software can directly integrate with your accounting software. This allows you to keep track of your payroll costs.
When you run a cash-only business, accounting software can help you accurately report your income and expenses to the IRS, avoid penalties, and make decisions about your business.
Editor’s note: Now that you know what a cash business is and how to use software to keep your business legal, you may also want to consider accepting credit cards with Harbortouch merchant services to boost your sales and grow your business even more!