Nobody’s mentioned something important: it’s not enough to just report the total cash you received throughout the year when April 15 rolls around. You’re required to pay estimated taxes throughout the year (generally in four installments) on any wages you get from which insufficient taxes are withheld. If you don’t, you could be subject to penalties. A paycheck, of course, avoids this hassle.
I was the business manager in a medium size business and was told that we could hire “Spot Labor” up to around a thousand dollars total. No taxes no insurance (they had to have their own) no contract labor. Pay cash and put it down as temporary help. Now, a thousand dosen’t go very far but we used it for outside labor such as replacing a window, things like that.
I’m in NC. Hope my CPA was correct! 
In addition, you can’t just report “illegal cash income” on your 1040. I you report it as income, you’ll probably have to report it as Schedule C self-employment income, like sole proprietors and independent contractors. However your Schedule C income is subject to Self-Employment Tax (Schedule SE), which is the equivalent of Social Security taxes for the self-employed.
The issue is that although employees have about 7.5% of their gross pay withheld for Social Security taxes (assuming they make less than $90,000 or so), employers have to match this contribution out of their own funds. If you’re self-employed on the other hand, you have to pay approximately 15% of your self-employment income in Self-Employment taxes.
Put more directly, if you declare cash income as self-employment income, you’ll be losing about 7.5% of your earnings in self-employment taxes you wouldn’t have to pay if you were legally employed at the same gross salary.
I’ve known of several cases where ex-spouses and noncustodial fathers of children chose to work for cash so the state couldn’t garnish their wages for unpaid child support. Charming, no?
This really depends where you live- Australia & NZ have a “Pay As You Go” (PAYG) system, where your tax is automatically taken out of your pay and sent to the Tax Department each week. (For all intents and purposes, anyway).
At the end of each Financial Year, you get what’s called a Group Certificate (in Australia), which states how much money you earned and how much tax you paid. Then you lodge your tax return, and either get a cheque or a bill in the mail.
For individuals, there’s no estimating likely future income (in most cases), and any income earned in the course of a hobby or won from gambling/competitions is tax free, too.
Of course, if you got paid cash for your regular job, and no tax was withheld… yeah, you see where this is going.
IIRC, a couple of years ago (1996, maybe?) the NZ IRD (Inland Revenue Department) left the “Did you earn any income that you did not pay tax on, eg under the counter/cash work?” question off the Tax Return form because no-one ever ticked “Yes” to it… I recall a couple of people commenting on it at the time, but as a 15yo I really had more interesting things to worry about that Tax Forms, so I may be misremembering it.
Aw, shucks.
–Cliffy