When it comes to taxes, no income earned from a job is exempt. Even if your employer hands you a wad of cash at the end of each pay period and doesn't withhold taxes, you have a responsibility to report that income to the Internal Revenue Service on Form 1040. Before you can file taxes when you're paid in cash, you need to figure out whether you're an actual employee or an independent contractor.

Worker Status

The distinction between an employee and an independent contractor determines how you file taxes and what taxes you need to pay. The IRS uses three categories: behavioral, financial and relationship of the parties to determine who's an employee and who's a contractor. Typically, if your company tells you how to work and where to work, you're an employee. If you're an employee, your employer needs to withhold taxes from your pay and also needs to pay unemployment, Social Security and Medicare taxes. While some companies try to skirt the issue, your employer shouldn't pay you in cash and expect you to figure out the taxes. If you're an independent contractor, you're on your own when it comes to taxes and usually need to pay estimated quarterly taxes four times a year.

Fill Out Schedule C

If you qualify as an independent contractor, you need to complete Schedule C, "Profit and Loss From Business," when you file your taxes. The company you work with should send you a Form 1099-MISC, but is only required to do so if you earned more than $600 during the year. Otherwise, it's up to you to keep track of and report all the income you've received over the course of the year. One benefit of filling out Schedule C is that you can subtract business expenses from your income, such as insurance, mileage and travel related to your work.

Don't Forget Self-Employment Tax

When you're an independent contractor who is paid cash, you're responsible for the full amount of your Social Security and Medicare taxes. In a typical employee-employer relationship, you pay half and the employer pays half. You need to pay the tax on any income you earned over $400. Fill out Schedule SE when filing your taxes to calculate your tax. While paying self-employment tax can raise your tax bill quite a bit, you can deduct half of the tax from your total income.

If You've Been Misclassified

Things can get a bit complicated if the company you work for treats you as an independent contractor when it should treat you as an employee. In that case, your employer can't legally pay you cash and expect you to handle all the tax issues yourself. You can complete Form SS-8 and submit it to the IRS, which will then determine your status. If you're actually an employee, you can fill out and submit Form 8819 with your return so that the company is responsible for paying half of your Social Security and Medicare taxes.