You can issue a 1099 to someone you paid in cash, but only if you paid them for business services and they are not your employee

A 1099 form reports non-employee income to the IRS. The fact that you paid in cash does not change whether you owe one. What matters is what you paid for and who you paid. If you hired someone as an independent contractor to do work for your business — whether you handed them cash, wrote a check, or transferred money — and you paid them $600 or more in a calendar year, you must file a 1099-NEC (Miscellaneous Income) with the IRS and send a copy to the worker.

Cash creates a paper trail problem, not a legal exemption. The IRS does not care how the money moved. It cares that income happened and was reported. Paying cash can actually draw more scrutiny because the IRS knows cash is harder to track, which is why they watch cash transactions closely.

Key Takeaways

  • You must file a 1099-NEC if you paid a non-employee contractor $600 or more in a calendar year, regardless of whether payment was cash, check, or digital transfer.
  • Employees never receive a 1099; they receive a W-2 instead, and you withhold taxes from their paychecks whether they are paid in cash or by other means.
  • The $600 threshold applies per person per year, so if you paid one contractor $400 in cash and $250 by check, you owe a 1099 for the combined $650.
  • You need the contractor's name, address, and tax ID (usually their Social Security number or EIN) to file a 1099, and you must send them a copy by January 31 of the following year.
  • Paying cash does not exempt you from filing; it only makes the transaction harder to prove if the IRS asks, so keep records of what work was done and when.

The difference between contractors and employees when you pay cash

The form you file depends on the relationship, not the payment method. If the person is your employee — meaning you control how, when, and where they work, and they work regularly for you — you file a W-2, not a 1099. This is true even if you pay them in cash every Friday. You still withhold federal income tax, Social Security tax, and Medicare tax from their paychecks and send those to the IRS. Paying in cash does not change this obligation.

If the person is a contractor — meaning they control how they do the work, they set their own schedule, they work for other clients, and you hired them for a specific project or task — you file a 1099-NEC if the total reaches $600 in the year. The contractor is responsible for paying their own taxes. You do not withhold anything.

The IRS looks at the actual working relationship, not what you call the person. If you pay someone cash and call them a contractor but they work for you full-time, show up at your location every day, and you tell them exactly what to do and when, the IRS will likely treat them as an employee. Misclassifying an employee as a contractor to avoid withholding is illegal and can result in penalties, back taxes, and interest.

When the $600 threshold applies to cash payments

The $600 rule is per contractor, per calendar year. If you paid one person $400 in cash in June and $250 in cash in November, you owe a 1099 for $650 total. If you paid five different contractors $500 each in cash, you owe nothing because each person stayed under $600.

The threshold resets on January 1. If you paid a contractor $600 in December and $100 in January of the next year, you file one 1099 for the first year and do not file one for the second year (unless they reach $600 again later that year).

Some states have lower thresholds. Massachusetts, Illinois, and Vermont require a 1099 at $600. New Jersey requires one at $5,000. Check your state's rules because you may owe a state 1099 even if the federal threshold is not met.

What information you need to file a 1099 for cash work

To file a 1099-NEC, you need the contractor's full name, current address, and tax identification number. For most people, that is their Social Security number (SSN). If they are a business, it is their Employer Identification Number (EIN). You also need their phone number or email if you have it, though it is not required on the form.

Ask for this information before you pay them or at the time of payment. Many contractors expect this question and will have it ready. If someone refuses to give you their tax ID, you cannot legally pay them. The IRS requires you to collect a W-9 form (Request for Taxpayer Identification Number and Certification) from every contractor before payment. A W-9 is free and takes five minutes to fill out. You keep it for your records; you do not file it with the IRS.

If you paid someone in cash and did not collect their tax ID, you still owe the 1099 if you reach $600. You will need to track them down to get the information before January 31, when the 1099 is due. If you cannot locate them, you may be able to file with an ITIN (Individual Taxpayer Identification Number) if they provided one, or you may need to report the income under your own name and explain the situation to the IRS.

How to file a 1099-NEC for cash payments

You file a 1099-NEC with the IRS using Form 1099-NEC. You can file on paper or electronically. Most small businesses use tax software (like TurboTax, H&R Block, or QuickBooks) that walks you through the form and files it for you. If you file on paper, you send Copy A to the IRS and Copy B to the contractor by January 31 of the following year.

The form asks for the amount paid in Box 1 (Miscellaneous Income). If you paid $500 in cash in June and $300 in cash in September, you enter $800 in Box 1. You do not break it down by payment date or method on the form itself.

You must also file a summary form called Form 1096 (Annual Summary and Transmittal of U.S. Information Returns) with the IRS if you are filing on paper. If you file electronically, the software handles this. The important date is January 31, but if you file on paper and mail it, the postmark date counts as long as it is on or before January 31.

Keeping records when you pay contractors in cash

The IRS does not require you to keep receipts, but it is smart to do so. Write down the contractor's name, the date of payment, the amount, and what work they did. A straightforward notebook, a spreadsheet, or photos of cash receipts all work. If the IRS ever asks why you filed a 1099 for someone, your records show you actually paid them for real work.

Cash is legal. Contractors are legal. The combination is legal. What is not legal is paying someone in cash to hide income from the IRS. If you are filing a 1099, you are reporting the income, so there is nothing to hide. Keep your records straightforward and honest.

If you use accounting software, enter the payment when you make it. Most software can generate a 1099 report at year-end that pulls all the contractor payments automatically. This is faster and more accurate than trying to remember cash payments in December.

What happens if you do not file a 1099 when you should

If you paid someone $600 or more in cash and did not file a 1099, the IRS may penalize you. The penalty is $50 to $270 per missing form, depending on how late it is and whether it was intentional. If the IRS finds out you paid someone in cash and did not report it, they may also audit you to see if other income was hidden.

The contractor may also report the income themselves on their tax return. If they do and the IRS sees you did not file a 1099, it raises a red flag. If they do not report it and you did not file a 1099, the IRS may come after both of you.

Filing a 1099 protects you. It shows you reported the payment. It shows the contractor that you are tracking the income. It makes the transaction official and documented.

Frequently Asked Questions

Do I have to file a 1099 if I paid someone cash under $600?

No. The federal threshold is $600 per person per year. If you paid one person $500 in cash, you do not file a 1099. However, some states have lower thresholds, so check your state's rules. Also, if you paid the same person $400 in cash and $250 by check in the same year, the total is $650 and you owe a 1099.

Can I issue a 1099 to a family member I paid in cash?

Yes, if they are a contractor and not an employee. If your spouse or adult child did work for your business as an independent contractor and you paid them $600 or more in cash, you file a 1099 just as you would for anyone else. If they are your employee, you file a W-2 instead.

What if the contractor does not have a Social Security number?

If they are a U.S. citizen or permanent resident, they have an SSN. If they are not, they may have an ITIN (Individual Taxpayer Identification Number), which is issued by the IRS for tax purposes. Ask them for their ITIN. If they have neither, you cannot legally hire them as a contractor in the United States.

Do I report cash payments differently on my tax return?

No. On your business tax return, you deduct the expense the same way whether you paid in cash, by check, or by transfer. The 1099 is separate — it reports what you paid to the contractor. Your business deduction and the 1099 are two different things.

Can I issue a 1099 if I do not have a receipt for the cash payment?

You can file the 1099, but you should have some record of the payment. If you have a note with the contractor's name, date, amount, and what they did, that is enough. If the IRS asks and you have nothing, you may have trouble proving the payment happened. Keep straightforward records even for cash.