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Is Paying Cash Illegal

Sometimes when people pay cash they do so with a wink. I think they are sending the message that this will be unreported income and they are helping me pull a fast one on the IRS. {sigh}

FTR, I report all income, including cash. Life is too short to look over my shoulder over cheating on my taxes, especially over such small amounts. Besides, if I want to cut my taxes there are a gazillion legal ways to do so.

But I do smile back when I get paid cash. Why? Because cash never bounces and doesn’t have merchant fees. Of course cash makes me happy.

What I don’t understand is when I sometimes pay cash (no winking) the small business owner gives me a discount. I am happy to take the discount. The idea is, I think, that the small business can now have some unreported and untaxed income.

But that does not make sense. If you give me 30% off, or even 10% off, for cash, you traded the tax liability for a discount. You take all the risk for none of the gain. Insane!

Of course, I take the discount when offered. But I in no way ever encourage tax fraud. Report your income and use legal strategies to reduce your taxes. Should the IRS be foolish enough to send you a letter it will be nothing more than a waste of their time chasing their tail.

CASH IS NOT ILLEGAL!!! Some people think small businesses like cash because it is illegal, almost like it is required to not report cash. {smh} No, my friends. Businesses report cash sales, at least the good ones. If you want to offer a discount, no worries. Cash does not bounce and there are no merchant fees. But report the cash. There is no stress that way when you get the mail.

But there is a cost to using cash. There is a cost to using a credit card or debit card. Without a wink, it is important to understand when to use cash and when not to.

Spending habits determine your level of financial wealth.
Cash is king because credit cards fees ultimately are paid by the consumer.

The Dirty Secret of Credit Cards

At the start of this year I raised my fees 30% across the board. Bank fees were one of the culprits forcing the pricing change.

Bank fees, mostly from processing credit cards, climbed 8.4%. For years I swallowed the increasing cost, accepting a lower profit so clients had the convenience of charging their accounting fees. This year became a catch-up year.

If I were in an industry with very narrow margins the issue would have become acute sooner. Restaurants, as an example, have less room to swallow costs. Restaurants either raise their fees or cut costs. Cutting costs means lower quality food, smaller serving sizes, or both. Many restaurants now add a 3% fee to payments made with plastic.

That is the dirty secret of credit cards. If a merchant does not add a fee for using plastic, the merchant added the fee to the price of all goods and services. When the fee isn’t added, everyone pays the fee!

Or the merchant goes broke.

Of course, the merchant isn’t guaranteed to go broke. But she will have a lower profit, putting her closer to the red line. Simple logic tells us that the closer to the line you are the greater the risk. A certain number of businesses will fail. This is because there is less room for error or economic shock. And a smaller reserve to handle financial stresses.

There is even a greater concern. If your employer calls you into her office to tell you your wage is getting cut, what does that do to your morale? Do you quit on the spot? Stick it out, hoping for better days? Even if you decide to stick it out, what is your attitude going forward?

The pay cut is exactly what is happening to business owners. Many decide it is time to quit or retire. Some stick it out, hoping for better days. Some raise prices or cut quality. Regardless, the business owner has a mental struggle to deal with. Nobody likes to work more to get paid less.

And that brings us to the dirty secret. When some businesses either fail or decide to close the doors, there are fewer establishments to manage the additional workflow. Some business close the doors to new clients. Many raise prices. A lot! Employees, as a result, work harder and with more stress so they want to earn more or they leave. Prices go up.

Inflation has a powerful negative effect. Even if your wage (or profits) remain the same, your buying power declines. A static wage during 10% inflation is a 10% pay cut. People can feel the effect. Economists talk about supply and demand. When demand is unchanged while there are fewer businesses to serve that demand, price will go up. That is the spark igniting inflation.

Inflation pressures are often manageable until wages come into play. Employees demand more and can get it, from you or your competitor. Don’t blame the employee, however. They are conducting the same exercise business owners are. Employees deserve a good wage for their time and prefer a pay increase over decrease.

When I raised my fees 30% you might think I would lose clients. A few did leave, but very few. Many more wanted in. I don’t take new clients. Refusing new clients is more an exercise of my stage in life; I am approaching the end of my career. If I wanted more clients I could have had more at the much higher fee. That is what happens when inflation bites and fewer people want a job and fewer want the headache of running a business. Bank fees do make a difference for all consumers, whether they use plastic or not.

When Should You Use a Credit Card?

You would think I am channeling Dave Ramsey with the rant above. In fact, I am not against credit card use, even in my office.

Credit and debit cards are convenient. It may be worth the extra cost to you. Small businesses do love cash due to no fees and no risk of a check bouncing or chargeback. (Yes, there are people that charge for goods and services and reverse the charge after they get the goods or services.)

There are times when you must use a credit card! Travel is one of those times. Carrying cash is risky. It can be lost or stolen.

Credit cards often have rewards points or cash back. Understand where those rewards comes from. You pay for those rewards with higher prices.

However, many credit cards have additional benefits that go well beyond points or miles.

It is common for a credit card to provide things like extended warranties, auto insurance coverage on rental vehicles, emergency services, trip cancellation and more at no additional cost to you.

Read the fine print. If you tossed the fine print that came with your credit card you can get the information online at the bank’s website. Every credit card is different. Which card you use matters.

Since travel has so many opportunities for rewards without a change in price, your credit card is your friend. You can back charge fraudulent claims. Many protections are provided at no additional cost because the merchant fee handled the cost. Most travel is hard to pay with cash. As a result, the merchant fees are built into the cost of the travel. You may as well use the advantages since they are already paid for.

Debit cards are a different story. Protections on debit cards are generally less than with credit cards.

Some debit cards now offer cashback, especially if you have a minimum number of transactions per month. Some banks offer a higher interest rate on a checking account balance when a debit card is used. Never assume. Always check what your financial institution offers.

Regardless, credit cards are more expensive for the merchant, hence the reason why the rewards offers. The whole system is designed to encourage you to spend more. (Something that goes against my grain.) Still, points and miles are something I utilize. And the credit card is the only thing I use when traveling or ordering travel. It is the safest choice in most cases.

My money! Cash is king. Our attitude towards money over a plastic card are very different. It can affect wealth.
My money! Cash is king. Our attitude towards money over a plastic card are very different. It can affect wealth.

Cash is King

Paying with cash is not illegal. Honest business owners prefer cash due to the lower fees.

There is another massive advantage to you when you use cash. Research has shown people spend more when they use plastic.

Cash is easy to monitor compared to a charge card. You can see your cash pile dwindle. It has a psychological effect. There is no instant feedback on the damages done from spending with a credit card. Those rewards are meaningless if they bankrupt you in the process.

Cash is king. It is a trusted payment method. And contrary to what credit card companies want you to believe, a cash transaction is not a pain in the backside compared to a card purchase.

I don’t use a debit card. If I use plastic I want the kickbacks and other benefits. Yes, I farm bonuses periodically. That is just smart money management. As a business owner, there are times of the year when expenses are high. A new credit card with an outsized bonus is often a good choice for those times. The cash back and travel rewards are significant and worth the effort.

Paying off your credit card in full by the due date is a must. None of the benefits exceed in value the interest expense.

At the end of the day, when you pay cash the merchant often will have a smile because they avoid bank fees on that transaction. Bank fees are significant so it makes a difference.

You must also guard against overpaying when using a credit card. The evidence is clear. People often overpay for the convenience. But it is not worth the extra!

Use cash when it makes sense; use credit cards when it is the optimal financial choice. Just know that those bank fees are built into the price you pay. Nothing happens in a vacuum.

And if more people use cash in my office, it will reflect in my prices in a short order.

Charles Hudson

Monday 27th of May 2024

I realize you said you do not take new clients. However, my wife and I are expats that have lived in Spain a little less than six months. We plan to be here another year to year and a half. We are retired and have no income from wages. Our income comes from Social Security, Required Minimum Distributions, Rental Income from our house, and Small amounts from capital gains. I have no idea what or how Spain taxes expats. We are looking for someone to tell us what gets taxed in Spain and what is taxed in the USA and any credits. Would you be willing to take on this project? (A 2023 Washington State return has been properly filed).

Keith Taxguy, EA

Tuesday 28th of May 2024

Charles, I really don't take on new clients. However, there is a list on the blog of tax offices that do, with the first listing focusing on ex-pats.

Use this link to get the Tax Professionals Near Me page. You can also find the link at the top of every page on the blog as well. The fist listing is Nomad Tax. They will probably be your best fit.

Rishiyur Mohan

Monday 27th of May 2024

Some merchants, like utilities, do not differentiate between ACH and credit card payments. It’s a no brainer to use a credit card in those instances.