The IRS requires you to report all income earned during each year, regardless of the form of that income. You must report cash income just as you would report any other income, such as your weekly paycheck. The amount of taxes you pay on cash income is exactly the same as the amount of taxes you pay on any other type of income.
Your employer may provide you with a cash bonus or some other type of cash income, in which case your employer is supposed to withhold your employment and income taxes on that bonus. Your employer should withhold taxes on cash income just as she does on your other regular forms of income. This means you should pay the standard Social Security, Medicare and income tax that is typically withheld from your paycheck.
Tips and Other Cash Income
Some forms of income do not come directly from your employer, such as tips. These types of income are still considered income even though they don't come directly from your employer and even though they are paid in cash instead of a paycheck. It is each taxpayer's duty to account for and report to the IRS all forms of cash income, regardless of whether the income comes from a client, customer or employer.
If you are self-employed and you receive income in the form of cash, you must report that income and pay self-employment taxes on that income, just as you would any other form of income. Self-employed individuals generally must file quarterly estimates for self-employment and income taxes.
If your cash income comes directly from your employer, your employer will take care of reporting the income to the IRS and withholding the appropriate payroll and income taxes. However, some employers do not take care of this for cash bonuses. Similarly, cash income from sources other than an employer will not have been subject to any tax withholding during the year. At the end of the year when you file your tax return, you will have to list any and all income not otherwise reported by your employer, including cash income. At that point, you will have to reconcile by paying your payroll taxes and income taxes on that cash income. You should save a portion of all cash income received during the year and use the savings to cover the payroll and income taxes you will have to pay when you file your annual return.