I Want To Hire Someone, But They Want Cash

By Randall Orser | Small Business

Broken Piggybank Shows Financial Deposit TNYou may be wondering why I used the word ‘hire’ in the title as to whether I mean an employee or subcontractor. I’m going to be talking about both situations. You basically hire someone whether it’s an employee or subcontractor. Cash is a sticky situation, and while it’s not illegal to pay cash, it’s how you treat the transaction that could make it illegal. In the employee situation, are you legitimately taking off deductions and then paying cash? In the subcontractor situation, are you paying off an invoice and it includes applicable taxes?

For our purposes here, a subcontractor refers to anyone you hire that is not an employee, whether it’s hiring someone to help you with your business work, or to do a website, or just to clean the office.


There is nothing wrong with paying cash to an employee, as long as you’ve taken off the deductions and are giving them their net pay. That is totally acceptable. You should also give them a paystub, and have a copy that they sign and date as receiving the pay. By having them sign a copy of the paystub, that you keep, you ensure the employee doesn’t come back saying he never was paid.

Now, if it’s a situation where someone wants to do some work for you, and get paid cash without you deducting the appropriate taxes, then you just have to say no. This situation will definitely come back and bite you in the posterior region.

I had a client that was paying employees cash, not doing the proper deductions, and not getting any kind of signed receipt that they actually received funds. By the time the client came to me it was too late, and we had a year-end to complete. Needless to say the client was screwed. All monies paid to these ‘employees’ could not be taken as a deduction for the company, and the client had to claim all these funds as a draw. The client ended up having to claim most of the funds as personal income, and owed thousands to CRA at personal tax time.


Again, it’s not wrong to pay a subcontractor with cash as long as you get a receipt and pay the applicable sales taxes (unless of course the subcontractor is a small supplier and thus not registered for the GST/HST). Whenever you’re dealing with someone who you’ve hired as a subcontractor, you must get them to invoice you, and charge applicable taxes; whether you’re paying cash or not.

A problem arises when the subcontractor insists on only cash, and then won’t give you an invoice or receipt. If this happens, then don’t do business with that subcontractor, it’ll only come back to haunt you. Canada Revenue Agency always requires you to provide proof of any deductions you claim against revenues, and in this situation you have no proof. With no proof, there’s no way you can claim a deduction.

Let’s go back to the client we discussed in the Employee section above. This client had some dealings with a subcontractor who refused to provide a receipt and would only take cash. By the year-end they had paid this subcontractor tens of thousands of dollars over the course of several jobs. With no proof that the client had paid this subcontractor, all monies paid this subcontractor were considered to be draws taken by the client. These monies were also added to the client’s income.

This scenario involved two people in a corporation; so all monies drawn were divided evenly between the partners. In the end the two partners ended up having to claim tens of thousands of dollars as personal income, and thus ended up owing a lot of money to the government on their personal taxes. Fortunately, the client took these draws as employment income, so the corporation did end up with a deduction.

When you’re in business, or deciding to start a business, it’s imperative that you set a policy when it comes to paying cash. I recommend to clients to never pay cash, and either writes a cheque or some kind of transfer from their bank that can be traced to the recipient. And, remember that subcontractor may not be considered a subcontractor by Canada Revenue Agency, so be careful.

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