ATMs and the IRS: Why Your Business Shouldn’t Take Cash Out of the ATM

47 thoughts on “ATMs and the IRS: Why Your Business Shouldn’t Take Cash Out of the ATM”

1. Hi A,
   Good question. What I tell people to do is that in the future, if you continue to work with that vender, you are required by law to do “back up withholding” of 28%. So, let’s say the $650 guy does another $650 job for you. You pay him $468 and you pay that other $182 to the IRS for his back up withholding. When he comes kicking and screaming at you, you say, “Oh, I’m required by law to do that until you give me your W9.” I have yet to see anyone not supply the W9 if you’re going to keep 28% of their income. But, if they still refuse, then you file the paperwork and send the $182 to the IRS and your behind is covered.

   But, you’ve already paid them, what do you do now? I think you’re right, file the 1099s with the information that you have. Then you’re going to get something called a B notice. Which basically means, you are supposed to correct the information about them in your files, and if you cannot get the correct information, you will be required to do back up withholding on them. So, you’re right, file with what you’ve got. Expect the B notice. And know that you’ll either need to quit doing business with them, or start back up withholding.

2. One of my bookkeeping clients has two subcontractors who refuse to complete their W-9 forms and provide their TIN’s. Also, they were paid in cash and did not provide receipts. The amounts are small, about $650 and $1500. Do you have any advice about what we should do? Can the owner compile a log right now detailing the cash payments to these vendors as backup? If we file the 1099’s with the information we have, without the TIN’s, could this cause an audit of both the subcontractors and the payer?
   Thank you!

3. Hi A,
   It sounds to me like you are doing everything right. If you are reporting those ATM withdrawals as owner distributions, then he won’t be double taxed because you are showing it as business income. If you were reporting the ATM withdrawals as expenses, then he could get taxed on them in an audit because there would be no proof of the expense.

   But I think what you’ve doing is right. So let’s say the OWNER takes out $100 from the ATM. He pays $50 for gas. You expense 50 for the gas and attribute $50 to owner’s draw. If he comes up with a receipt later for office supplies for $50 – you can adjust the entry and expense that as well, but without some sort of documentation for those ATM withdrawals, they go to Owner’s draw.

4. I am a bookkeeper for a sole proprietorship LLC and the owner does take out ATM withdrawals from time to time to pay delivery people, etc. I always record all ATM withdrawals as Owner’s Draws; then any cash payments for business expenses made using those withdrawals as Owner’s Investment (i.e., ATM withdrawals debit the Owner’s Draw account and any cash payments to vendors credit the Owner’s Draw account). I urge the owner to keep all receipts for any business expenses paid in cash to be able to prove these payments. As far as the red flags you mentioned, saying that the IRS would want to tax those owner’s draws as income, are you saying that the IRS would ever want to tax the withdrawals as income IN ADDITION to the business revenue reported on the Schedule C? Would they not understand those withdrawals as profit distributions? Or are you simply saying that they might not allow the expenses being claimed, so that the taxable income would not get reduced by that amount?

   Thank you!

5. Hi Ashley,
   Good question. And an awkward situation for you. Technically, when the boss writes a check to himself – and it’s not a payroll check, and there’s no receipt for the reimbursement – that’s an owner’s draw. But you are his employee – so, you’re kind of in a weird spot. He tells you it’s for gas – it’s for gas, right? But where’s the receipt? Arrgggh!
   Here’s what you do. You explain, “Hey boss, I’m doing your books and I want to make sure that you’re audit proof with these checks. I need your receipts for these items. We want to have everything backed up for the IRS.” He probably really is getting gas or materials. But as the bookkeeper, you want to see that he’s covered. (You want to see that your butt is covered too.)

6. Hi Jan – how is writing yourself a check with no back-up and using it to give yourself cash any different than an ATM withdrwarwal? For example, the owner of the company I just started working for has written checks either to himself or to Cash with no paper back-up. He writes on the stub that it’s for “gas” or “materials” but there is again, no receipts. How should I record for these? As owner draw?

7. Hi Jesse,
   So are you going on a business trip or on vacation. Business trips are deductible, vacations are not. If you are taking cash out of your business, it is considered to be an owner’s draw. If you are taking cash out to spend on the business, then get receipts and document, document, document what you’re doing and why.

8. I’m going on business vacation where they only accept cash. How do I take the cash out to be able to make specific purchases a write off?

9. Hi Tim,
   Technically, you should have a separate bank account when you open your LLC. You didn’t, bad boy, hand slap.

   That said, if you were going to keep the business and go forward with it, I’d open that separate bank account. But it sounds to me like you’re closing it down so I wouldn’t lose any sleep over it.

   Here’s a post that might help you: Small Business Basics

   Quick and dirty – I expect you’ll owe about $300 in self-employment tax, maybe another $300 or so for the regular tax on your business. (It depends upon your tax bracket, I guessed at 15%.) So that would be $600 altogether. Make sure you’ve deducted for all of your expenses. Don’t forget gas, mileage, etc.

   You will do your taxes on a form Schedule C and it will be part of your regular 1040 tax return.

10. I have a question just started lawn business 1yr ago but just got my llc 7 mths ago..mostly cash customers but some checks..I haven’t got a business account just personal checking acct I own my own business sole proprietor llc but I have no idea how to pay taxes what forms to use how much taxes to pay in Oklahoma..And money I withdrew of course was from my own personal checking acct.. I have kept every receipt of my expenses which is over $5000 and after expenses in a year profited about $2000.. Its a small business just personal lawns with push mower not riding one.. What percentage of tax do I pay ..running a business is very complicated. .. I m not out to cheat IRS I just wanna pay what I owe whatever that is.. I do all work myself so not paying anyone but me.. but lookin to withdraw the business as hasn’t been profitable more of a headache than anything else.. Will I be fined for not opening business acct and not paying my taxes quarterly? I’m just so confused about all of this..

11. Hi Shireen,
    Yes. Sometimes that’s the only way you can do it. Now, if you’re in a situation where you can use your business credit card – well that’s better as far as record keeping goes. But I understand that it’s not always an option in some situations. As long as you are documenting what you’re doing – that’s what’s important.

12. Just to add to my question above…its a sole proprietor business.

13. Hi Jan,

    I have a small women accessories business in California. If I want to buy some small goods for my business from a supplier overseas while travelling to that country how should I make the payment then? Can I still write a check to myself, get the cash(exchange the currency) and pay the supplier and keep the receipt? Is that the right way to do it?

14. Hi John Doe Smith (like the name),
    So if you had a bank account in the LLC’s name, and you took cash out of the ATM, then I would record those withdrawals in Quickbooks as owner draw.

15. Hi Laura,
    You may pay yourself from your business. You may withdraw funds from your business. That’s all perfectly legit. What I don’t want people to do is get cash from the ATM from their business account to pay business expensee. Example: Let’s say your a caterer and you pay your helpers in cash instead of checks. Your bank statement will have lots of cash withdrawals which – if you were to get audited, the IRS would could all those cash withdrawals as owner draw and not as a business expense. If you take cash out of the bank as your owner’s draw – that’s perfectly fine!
    Now, since you put diesel in the van – was that your business van? Well, then you should pay for that with the card instead of the cash. But- take that receipt, and reimburse yourself for buying the company car gas with your own money. See how easy that was?
    In a perfect world, when you want an owner’s draw – you should write a check to yourself from the business. But what you did is not wrong or bad or anything.
    Good luck with your new business!

16. Hey Jan,

    Thanks for the informative post! Your work is a great help to us figuring it out.
    I’m currently sorting out my life out after a period of recklessness and preparing taxes for the last few years for my LLC.
    I have made many cash withdrawals from the ATM for personal use.
    How should I record it in quickbooks?

17. Hi Jan so I started my own llc three months ago and I’m not trying to do anything illegal or pay back the IRS specially since I’m starting. Today one of my friends told me DO NOT WITHDRAW from your business. I actually already took out at the teller window approximately $2,400 to pay myself and from there I put diesel on the van etc . I should be doing all of that with the card I understand now but what about my “pay”
    Do I make a check payable to myself and cash it against my personal account ?

18. Hi Mike,
    So, you withdraw $5,000 a month for business entertainment for a year, that’s $60 grand in business entertainment. As a business expense, only half of the entertainment is deductible so that would be a $30,000 write off.
    That said, meal and entertainment expenses are one of those things that do get looked at. If you’re really spending that much on entertaining, then you’ll want to be sure to keep receipts and good records. Who are you meeting with, what was the meeting about? Was the purpose of the meeting to make money?
    Some entertainment may be 100% deductible – for example if you host an event where the entire purpose is for selling your product – like when you host an event at your place of business and there are refreshments. If you can substantiate the intent of the event and the expenses, that could be a 100% deductible entertainment expense.
    Bottom line – have receipts for all the entertainment and be able to document who you entertained and why.

    One last caveat – and I’m not saying that you do this, but an accountant friend of mine ran across it in an audit before. A gentleman traveled extensively for his business and had a large number of “entertainment” expenses. He chose to write them off as he was traveling and you can write off your expenses while traveling. Sadly, his “entertainment” expenses consisted of going to strip clubs and the majority of the money spent was for “tips” and “lap dances” which were all paid for in cash. He was never entertaining clients at these events. The IRS did not allow these expenses. So, I just wanted to put that out there – when you use your business funds for entertainment – you need to document, document, document and keep receipts.

19. Hi Jane I have a question if I withdrawal money from my business bank account and its used for entertainment purposes do I have to pay the full tax as income? Let say you withdraw 5k in a month on business entertainment every month for 1 year?

20. Thank you very much for your reply.

    btw; i always save receipts and all papers from business related expenses, i try not to use cash for business expenses.

    Thank you very much!
    Jonathan Bonilla
    Bonillas Lawn Care

21. Hi Jonathan,
    I think that’s good. When you’re taking the cash out, it is for personal use and that’s how you’re labeling it so it’s all good. Where people get into trouble is when they take cash out of their accounts for a business purpose and then they have to back up to support the business deduction. But what you’re doing makes sense.

22. Hello…

    what if i use quickbooks online and my business bank account is connected to it and every time i get cash out i can categorize it on quickbooks (i usually get cash out and categorize it as ´profit or earnings for ´personal use)

    i have 1 person working for me and pay him with a business check (no poayroll no deductions) and at the end of the year I give him a 1099.

23. Hi Rebecca,
    You’re doing everything right so I wouldn’t be worried. ATM withdrawals are being charged as owner draws – that’s right. Keeping receipts for those rare exceptions – that’s right too! I’m thinking they’re lucky to have you around!

24. Thank you for all the info. You made it very easy to understand! My question is, I’m a bookkeeper for an LLC. This LLC has a 3 bank accounts. One for the main operations for the company and one each for the owners’ personal use. The owners use the ATM for cash withdrawals. These cash withdrawals are expensed to their personal ‘Draw Accounts’. Does that raise any red flags, since it goes under their personal draw asset accounts? Also, if in the case of emergency or last minute situations, if these ATM withdrawals for cash are in fact for the business, even though it raises a flag, we just need to be sure to keep receipts and paper trails, correct?

25. Hi Tony,
    This is also a really good question. Remember, I’m an accountant, so I’m going to say “All of them!” And quite frankly, that’s pretty good advice. (Even if I do say so myself!) But, seriously, if you were to be audited, if you were missing some receipts that were under $50, the IRS would most likely let those pass BUT—I don’t recommend not having receipts. Keep the receipts! The reason is – you’d have to really fight for those numbers. Also, it’s so much easier to go into an audit with receipts than without.
    If you’re missing a few small receipts – I wouldn’t sweat that. But moving forward, I’d hang on to them all. Better safe than sorry!

26. Hi Tony,
    There’s a couple of different answers here. Most importantly though, it doesn’t matter how much your employer pays you in a day – but over the course of a year. So in most cases, if you are paid over $600 – you should be issued a 1099MISC. Now household employees are a little different – an employer can pay one person up to $1700 before having to worry about SS and medicare taxes. So there is a bit of a difference depending upon the type of work you’re performing.

27. secondly how much cash expenses allowed in business without receipt………… is every single receipt of ever expense even of 10 $ have to keep in records?

28. hi, my question is how much a employer can pay as daily wage in cash to a worker without issuing 1099mics and SS and Medicare tax……… thanks

29. Dear Ana,
    Dear, dear Ana, You are perfect! Having a separate bank account to set aside tax money is a great idea!
    So you mention having a daughter but are you married? If not, I have a young man I’d like you to meet. Sorry, that was out of line but I was so excited! I feel like being a matchmaker! Okay, I’ll get myself under control.
    Anyway no, a separate bank account for taxes won’t raise any red flags at all. You’re just being smart. It’s all good.
    Also, you mentioned your daughter working for you. You might already know all this stuff, but I’m putting a link about hiring your kids here just in case: http://robergtaxsolutions.com/tag/hire-your-kids/
    Thanks for asking. (Oh, and our offices are in St. Louis–just sayin’, just in case. 🙂 )

30. I loved this article, very simple and easy scenarios without all the IRS jargon that many blogs use. I wanted to ask is it legit or am I raising a red flag if I withdraw money from my bank account (by check to myself) to keep in another bank account? The purpose for the other bank account is to save up for taxes to always make sure I have enough at the end of the year and also just in case of an emergency. I just do not like to keep all my money in one account, however the account I am putting it into is a personal account, my personal. I am a sole proprietor of my business but I do have my daughter as a joint on every account because I cannot leave work during normal business hours and she is a big help. Thank you in advance.

31. Yeah, it’s a simple concept really. I purchase and place my own ATM machines. It’s just a matter of keeping the machines full of cash, then with each transaction, the money withdrawn by the consumer gets cycled back into my business bank account plus surcharge and a small percentage of interchange from the user’s bank. The ATM business is along the lines of owning a vending machine business, just with cash instead of sodas, snacks, etc. My bank’s ATM inside the location lets me withdraw up to $1500 and of course I can pull out more cash via bank teller. I just wanted to know which method would be best since I am frequently making withdrawals. I have been keeping every receipt so far. And what about for personal use? Let’s say that I need funds to make a large purchase for myself (not related to my business at all), would I be able to just write myself a check for that amount? Or perhaps wire transfer the money to myself? I am the sole owner of my business, if that makes any difference.

32. Hi Al,
    Wow, this is totally out of my league. I’ve never dealt with someone who owned an ATM business. I always thought of that as being the bank, I had no clue that you could own an ATM business. I’m feeling kind of ignorant.
    It seems to me–but hey, I’m ignorant here so I could be way off base, but wouldn’t you need to get more cash for your ATM runs than what your bank’s ATM would dispense? Wouldn’t you have to go to the teller?
    But I’m going to defer to you on this one, this is your line of work. It seems to me that as the ATM guy, you must have some pretty strict accounting regulations. So that would be your number one priority is making sure that your records for your reporting agency are tight. If they’re okay with you taking money from the bank’s ATM, then it’s not my call.
    Bottom line: document, document, document! Make sure you cover your behind since you’re dealing with such large sums of cash.
    Sorry, I’m still trying to wrap my head around the idea of going to the ATM to withdraw money to put into the ATM. I find that to be really cool.

33. Hi Jan,
    I own and run an ATM business and was wondering about pulling out the cash to fill my machines? Would I have to write a check from my business account to my personal account every time that I need to refill my ATMs with cash? Or just withdraw from my business account with the teller instead of using the ATM inside the bank? What about if I were to do a transfer from my business account to my personal (which is with the same bank) before withdrawing for my weekly route refills?

34. Hi Danhurst,
    Emergencies happen. The important thing is just documenting the ATM transaction. So, if you put money back in, make sure you don’t record that as income to the company–you wouldn’t want to pay tax on that. If you don’t need to put cash back into the company, you can just keep the money and label it as an owner’s draw.

35. Hi Kathrine,
    I was just having a discussion about this the other day, your timing couldn’t have been any better!
    Here’s the thing–the owner of the LLC owns the business, so that money is his to withdraw.

    Now, if you’re doing books for the business, you may be thinking – Hey! We need to pay some bills here, etc. Legitimate concerns, obviously. But, at the end of the day, it’s the owner’s money and the owner’s business.
    Now, is he being smart? Maybe not, but it is legal to take money from his own LLC.

    Now, here’s a few more things to think about. Is the LLC set up as a sole proprietorship, or an S corp? I’m guessing it’s not taxed as a C corporation — that could be an issue if that was the situtation.

    As a sole proprietorship, he not only has the legal right to withdraw money from the LLC, that’s really the only way he pays himself. And of course, he’ll pay self employment tax on all of the income.

    As an S corporation, he should be receiving a wage, just like any other employee. But, in addition to the paycheck that he’s getting from the S corp, he is also allowed to withdraw money – it’s called an owner’s draw. So that is still legal as well. Once again, he will have to pay tax on the company profit, meaning, he’s paying tax on those draws also.

    One thing about being the owner of a small business when you’ve got cash flow problems. He may be drawing money out, but when he’s really got to pay a business bill–he’s also got to put his own money back in to pay the bills (unless of course he’s got business loans.) But he’s still responsible for paying those loans too.

    Bottom line, be sure to track the withdrawals as owner’s draw because that’s not considered to be an expense and he will be taxed accordingly. But what he’s doing is not illegal.

36. Hello,

    I had to take cash out on my business card for an emergency. Could I have my personal account credit my business account for that expense?

37. The owner of an LLC keeps withdrawing thousands for his personal use. He does write himself checks though. The company has issues with cash flow but he still does it. Is that legal?

38. Hi Bob R.,
    That’s exactly what your card is supposed to be used for. Using the ATM card is a good thing. (My bank eliminates the bank fees if I use my ATM business card at least once a month.) I just don’t like to see people going to the ATM and taking cash withdrawals out because the IRS treats that as owner income.

    Although in your case, I would have even said okay to take cash out that night. I mean really–you had to have been exhausted! I would have just told you to document it–cash out for the hotel, or gas, or whatever you needed.

    So do use your business card for things like hotels, film, processing, whatever types of expenses you’ve got. I just shy away from pulling cash out of the ATM on the business card.

39. I was shooting photography for a wedding. After the 5 hours of coverage was over the bride and groom asked me to stay later for some more shots at the hotel of the after party. Long story short it was about 1am when we returned to the hotel from the reception hall. The groom got into a fist fight with 2 of his brothers and the photos did not happen. I was too tired at the point from frustration to drive so I booked a room to stay overnight using my Buisness card. Is that ok?

40. Hi Tracy,
    You’re right. A person like you really does get stuck using cash quite a bit. I liked your question so much, I actually made a separate blog post about it. See this: http://robergtaxsolutions.com/2013/08/the-petty-cash-account/

    The big issue for you is keeping good records. You usually won’t get receipts for using mass transit so that’s hard–but write things down. See the post. And thanks for helping me come up with a blog post–sometimes I get writer’s block but question was just what I needed.

41. What options do I have when I need to pay for cash transactions like Mass Transit & Taxi’s (I don’t drive) which total over 250/mo.(expensable as fringe benefits per IRS 15-B), or even office & software supplies both in person & online.
    (New C-corp w/ 1 employee: me)

    Credit Cards don’t issue without corporate credit (which’ll take a year +), so can only use Prepaid Cash cards – which have to be paid by cash.
    There are very few places where I can use my corporation check. So using checks as a paper record is out.
    What do I do ?

42. Hi Maggie,
    I really am complaining about ATM withdrawals here. You can take withdrawals out by writing a check or doing a bank window withdrawal. I like those because of the paper trail they provide.

43. Is this just atm cash withdrawals or would this be for all withdrawals?

44. Hi Paul,
    I think your business is the exception. Just keep good records when you do it. You’re good.

45. I do allot of shopping at local sales and flea markets. I took 100$ out of my buisness checking (LLC) account for a part I needed, 1 day only sale seller would only take cash as I was at a flea market. The only atm card I had was my buisness card. Have a recipts for the purchase to $98.00 Did I covere this as an legit expense? The resale of this item will bring in profit. I do not plan on making this a habbit. But you get the best deals with cash. Next time I will just cash check.

46. Hi Jake,
    You ask a really good question. Here’s where I’m coming from–I work on tax audits, you know when the IRS is examining people’s tax returns. You guys who do a lot of business in cash always get the raw end of the deal in an audit.
    I understand that there are times when you need to use cash, but if that’s the way your business runs (and hey, you do what you gotta do to stay in business) but if you’re using cash then you want to document, document, document. Everything must have a receipt. If you’re paying contractors in cash–you’re still going to want to issue them 1099misc for the work.
    Is this all a pain in the behind? Yep. But you want to cover your behind.
    It sounds like you are doing a good job of keeping records and receipts so I guess you’re okay. If you use cash for the business, you will need to take out ATM transactions–it sounds that that’s what your business needs.
    Most businesses don’t rely on cash. What I see during audits is business owners taking cash out for personal use from their business account–it messes things up.
    You sound like you’re different–you need to use cash for your business and it sounds like you’re doing it in a responsible manner.
    Now if it’s possible to use checks or debit cards to create a paper trail–I’m all in favor of that. But if you truly need to operate in cash–then you use cash.

47. So if my business is an all cash bizz, meaning I pay for all my stuff via cash and keep records of the purchase price and what the item was and then record the sale price once it’s sold, how can you keep liquid legally and keep your inventory coming in?

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