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What are Cash Taxes?

Mary McMahon
By
Updated Feb 21, 2024
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Cash taxes are, quite simply, tax obligations which are paid in cash. This term is generally used to refer to taxes paid by companies, both on behalf of their employees through tax withholding and to meet their own tax obligations. Individuals may also pay cash taxes if their tax liabilities exceed the amounts withheld on their behalf, or if they are working independently. Since companies can have very large obligations which they must pay, usually quarterly, calculating cash taxes is more of a concern for them than it is for individuals.

Tax liability depends on income or profits balanced against exemptions and deductions. Once a final number is arrived at by an accountant or tax preparer, it is sometimes possible to directly reduce it through deductions or tax credits. In the corporate world, a number of government incentives are provided in the form of direct deductions from tax liability which are designed to provide companies with more income after taxes. The rest of the tax liability must be made up with cash taxes. Typically, taxation agencies do not extend credit or other payment options, and want cash or cash equivalents to satisfy tax bills.

When calculating net income, cash taxes are an important consideration. One can simply look at the gross income minus cash taxes to see new income after taxes, although it is also possible to deduct expenses, such as interest paid on loans and fees paid for rents, to arrive at a more accurate estimate of final yearly income after all expenditures. This number can be used to calculate general financial health, and may be made public in filings made by publicly traded companies.

Occasionally, people or companies have trouble paying their cash taxes, for a variety of reasons. Tax agencies may be willing to set up a payment plan, although the interest is usually quite high, and this is an important factor to consider. Some tax agencies encourage citizens to consider taking out loans or liquidating any available assets to pay taxes because this can be less costly in the long term than setting up a payment plan and managing the interest on it.

People who suspect that their tax liability is incorrect can consult an accountant for a second opinion on the matter. However, it is advisable to avoid accounts who claim to be able to guarantee a reduction in tax liability, or who claim fees as a percentage of taxes saved.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a WiseGeek researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments

By nony — On Jul 17, 2011

@everetra - I had a friend who bought a car with that cash for clunkers tax credit. I was thinking of jumping on that program but the requirements were so selective.

It had to be an old car that got really lousy gas mileage. My car wasn’t that bad – it was an old Chevy, but the gas mileage was fair. There was other fine print too, from what I understand, and of course everyone wanted a piece of the action.

The dealers weren’t too happy about the program either because they had a hard time, in the end, getting their reimbursement from the government for credits they extended.

I say it’s better to be rich and buy the car of your dreams rather than rely on a tax credit program from the government.

By everetra — On Jul 16, 2011

@Mammmood - Wow, I feel for you. I’m glad your side business is picking up but you have my sympathy about having to pay extra taxes.

I still live in that humble world where I don’t make enough money and therefore I get a tax refund every year. I even bought a car using my refund of $2,000 of as down payment.

It was one of those dealers that let you cash tax return refund checks right on the spot, without the need for a bank. I gave them the check, signed on the dotted line, and got a good monthly payment. It was easy.

By Mammmood — On Jul 15, 2011

@Monika - I’ve been working on the side as a sole proprietor of a software consulting business for quite some time.

Up until last year I haven’t made enough money to make a huge impact on my tax bill – I’m usually able to meet the obligations. I think the same will be said this year, except I fully expect the tax bill will be larger because I’ve picked up a few big contracts on the side.

I’ve used a tax calculator and projected what my total tax liability will be, based on income from my day job and expected revenue from the side work.

My only concern is that I may get hit up with a penalty for underpayment of taxes. Going forward, however, I will probably set up quarterly payments, assuming the side work continues to pick up.

By Monika — On Jul 15, 2011

@ceilingcat - Sounds like keeping good records is a must for the self employed!

I never knew the IRS offered payment plans until a few years ago. Someone I knew ended up with a giant tax bill at the end of the year and was unable to pay it. He set up a payment plan with the IRS and has been paying them monthly for a few years. I think he has another little while to go before he's done paying them though!

By ceilingcat — On Jul 14, 2011

In the United States if you are self employed the IRS expects you to pay your cash taxes quarterly. When you work for someone else they are responsible for withholding the taxes from your paycheck. But when you work for yourself you get paid directly by your customers and no taxes are withheld.

Keeping exact records of what you make is a must if you're self employed. When you pay your taxes you are expected to claim the amount you have made and pay taxes on that amount. You don't need to submit your records with your tax return but if you are audited you will need these records to prove you didn't make more than you said you did.

Mary McMahon

Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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