Cash Wages

What Are Cash Wages?

Cash wages are compensation for employees that come in the form of spendable money. Cash wages can include actual cash currency, checks, and money orders. This type of compensation excludes benefits like health insurance, 401(k) contributions, and stock compensation.

Understanding Cash Wages

For the average worker, cash wages represent the bulk of compensation. A recent report from the Bureau of Labor Statistics shows that for private industry workers wages and salaries make up about 70% of total employer compensation costs.

The amount of cash compensation for a given job is generally determined on a competitive basis, especially in a tight labor market. If a company pays a worker $75,000 in salary for a certain role, another company must offer more or less the same amount to recruit a worker for a similar role that is vacant. For lower skill level jobs, cash wages can comprise the entirety of compensation. In these instances, the company offers no additional benefits such as health insurance, tuition payments, or transit reimbursement.

At the upper echelons of a corporate structure, cash wages decline as a proportion of total compensation. For example, some companies have an equity compensation plan, offering stock incentives for executives to meet specified performance targets or for long-term retention purposes.

It is not uncommon for a large public company to pay less than a quarter or a third of compensation in the form of cash salary to top managers, with the rest in the form of equity. A battery of additional perquisites, such as country club memberships, financial advisory services, spending allowances, first-class travel privileges, etc., are also frequently offered to executives as non-cash compensation.

Cash Compensation vs. Non-Cash Compensation

Cash compensation may be preferred by employees because by its nature money is flexible and fungible. An employee receiving cash can exchange the cash they receive for whatever non-cash goods and services they want, provided they are available on the market.

However, in some cases, either the employee, the employer, or both might prefer some form of non-cash compensation for a variety of economic reasons. It might provide a tax advantage over cash or help to overcome a principal-agent problem.

Cash or non-cash rewards and incentives might be used to manipulate employee behavior in specific ways based on theories from behavioral economics, or as part of a strategy of gamification in the workplace. Non-cash compensation might provide some additional benefit to the employer, such as promoting brand recognition and loyalty by offering free or discounted products to employees.

Non-cash compensation may also be used to foster asset specificity in human capital or other investments in an employment relationship. For example, tuition assistance offered to employees limited to training programs for skills that may not readily transfer to other employment opportunities may be offered as compensation in an effort to lock employees into a job track. In this situation, employees might prefer cash compensation, even at a lower nominal value than the offered tuition assistance, since the cash is fungible and its value is not dependent on their relationship to the employer.

Reporting Cash Wages

The recipient always reports cash wages as ordinary income to tax authorities. Wage-earners must pay taxes out of these wages, regardless of how it is paid out. Usually, the employer is responsible for withholding payroll taxes and reporting employee wages.

In certain types of trades such as food and beverage service, construction, child care, and other personal services, some workers and employers pay cash wages "under the table" to avoid paying income and payroll taxes, but it is illegal to do so.

However, some types of non-cash compensation are not taxed. Commuter and transportation benefits such as mass transit passes, occasional meals, employer contributions toward insurance premiums, and educational or tuition assistance benefits may all be excluded from being taxed.

Example of Cash Wages

Cash wages often make up the largest source of income for employees. As an example, the chart below depicts the breakdown of the average income earned by public-sector employees of the state of New Mexico (which was $82,389 in 2020). Cash wages are the largest single source of compensation, followed by the value of insurance and other benefits.