When my client tells me they are paid in cash and received a 1099, my first question is to ask what it is they do for a living. If the answer is anything other than I own my own business, I dig deeper. Here is the problem: being paid in cash means that payroll taxes are not paid and withheld on your behalf nor are they automatically reported to the Social Security Administration.
The IRS has clear rules for determining if a person is independent or employed. If you are employed, your employer is required to pay payroll taxes bases on your compensation. If you're an independent contractor you must pay self employment tax as discussed in a previous post. The IRS rules basically state that if the person your working for dictates where, when and how you do your job, you are an employee. It does not matter that they pay you in cash, they are still obligated to pay payroll taxes on those wages. If you are the person in control of who you work for, when you do your job and how you do it then most likely you are self-employed and you are responsible for your own taxes.
So what happens if you're an employee and your employer is paying you cash but doesn't withhold taxes? The first thing to realize is that when you file your tax return, you will be paying those taxes if you want it credited to your social security record. Is there a way to correct this? Yes there is.
The IRS allows employees to file Form 8919 to report uncollected social security and medicare taxes due on their wages. This form will ensure that the employee's uncollected SS and medicare taxes will be reported to the Social Security Administration and properly credited to their record. Remember, to be eligible for this form you must be an employee who was misclassified as an independent contractor. Please visit the link above for details.