Paying Employees “Under the Table”: Is it Worth the Risk?
Most employers pay their employees via check or direct deposit. These payments are usually documented, which aids in handy when assessing the financial state of an organization or proving compliance with employment laws. However, some employers just don’t want to go through the hassle of processing payrolls every few weeks. Others can't afford to pay payroll taxes and insurance. These are the employers who prefer to pay employees “under the table.”
If you’re an employee or contractor getting paid under the table, taxes aren’t withheld from your income. However, this doesn’t mean you’re exempted from filing, reporting those wages, and paying taxes.
Yet, many people (employers and employees) accept cash as their payment method from side jobs or other work-related transactions, and the amount is not reported. The thing is, working and getting paid under the table is probably not a good idea. What’s more, both parties risk being slapped with federal and state penalties.
What Does It Mean to Get “Paid Under the Table?”
Paying someone under the table means to pay them in cash, without deductions. Cash is harder to trace. If you're not filling out tax forms and aren’t recording wages via a W-2 form, then it’s a form of tax evasion, and therefore, illegal. Paying under the table is sometimes referred to as unreported employment.
Since the employer or business isn’t deducting taxes from the employee’s paycheck, the Internal Revenue Service (IRS) is not aware of the worker and their employment status.
If employees are unrecorded, then as an employer, you have violated your legal responsibilities of obtaining state-mandated insurance. This includes workers’ compensation, disability insurance, unemployment insurance, and social security taxes. To put it simply, you’re intentionally refusing to comply with the various federal and state employment laws. Even worse, you're participating in one of the most common types of employment tax non-compliance.
Is It Illegal to Pay Employees Working Under the Table in Cash?
It's worth noting that getting paid under the table is not necessarily illegal in itself, as long as you report it to the IRS. Keep in mind that if you get paid under the table or pay employees in cash, you’re still obligated to report employment taxes.
As an employee, you should do so in a regular and accurate manner, including deducting and depositing the taxes as required. Failure to do so, and the IRS finds out that it was willful, would be considered fraud, and there could be grave consequences.
Employers are required to withhold the following taxes from wages paid to their employees:
1. FICA (Federal Insurance Contributions Act) Taxes. Under this law, employers must:
- Withhold and deposit Social Security and Medicare taxes
- Match the amount withheld
2. Federal Income Taxes. These taxes, just like FICA or payroll taxes, must be withheld from wages paid to employees and deposited as stipulated by the law.
That said, it is unlawful to pay or receive payments “off the books.” Small businesses are prone to paying employees in cash because it's easy and efficient than following the legal process. However, it’s a very bad idea for multiple reasons worth exploring.
Consequences of Paying Employees Under the Table
Employers who pay their workers under the table might think it’s a way to avoid tax obligations. Some common types of gigs where employers pay in cash include babysitting, cleaning jobs, pet sitter/dog walker, landscaping, snow removal, and handyman, to mention just a few.
While it may seem easier and cheaper, it might come back to haunt you in the future. So, why do employers choose this route anyway? Here are some reasons:
- Some employers don’t want to contribute taxes or enroll in workers’ compensation insurance.
- Some employers pay cash under the table so they can hire employees not authorized to work in the United States.
- Some employers don’t want to deal with the hassle of recordkeeping.
- Other employers create false employment tax returns by paying cash.
- Others use the employment taxes that they should be withholding to settle personal expenses or creditors.
If you think that the IRS may never find out, consider what would happen to your business if one of the scenarios below plays out:
- An employee files for social security benefits and gets a lower payment than expected. He then makes an inquiry with the Social Security Administration.
- An employee gets injured on or off the job and files a workers’ compensation claim for insurance.
- A disgruntled employee, a past employee, or one going through a divorce or child custody issues files for unemployment benefits. This can trigger a chain of events that could lead to your business being audited.
The IRS has a large database that it can use to find irregularities in business owners’ income and lifestyle. The auditors are trained to detect things that raise red flags, which can form the basis of an investigation. As you may be aware, any kind of investigation from the IRS could hurt your business.
That said, the consequences of paying unreported wages can be severe. They include:
- Upon discovery of tax evasion following an IRS audit, you'll be required to pay back all money owed, plus applicable interests and fines.
- You risk being put out of business. If you were paying employees “under the table” and they are injured on or off the job, they have the right to file a claim for workers’ compensation. The ensuing investigation may uncover the unreported wages, and you’ll be in big trouble.
- You risk jail time for fraud. According to IRS, there’s a high chance that you’ll be incarcerated for malpractice of paying employees under the table.
Consequences for Employees Who Get Paid Under the Table
Employees may request to be paid under the table for various reasons, including:
- Eluding child support and alimony payments.
- Reporting less income, thereby paying less tax.
- Avoiding detection by U.S. Citizenship and Immigration Services.
- Dodging the garnishment of wages to pay debts.
While it may seem to currently work in your favor, you may lose out financially in the long run:
- If you're paid under the table, you may not be able to collect unemployment benefits, among other perks offered by the government.
- If you're injured on the job, you may not be able to file a workers’ compensation claim.
- You won't be able to receive Social Security benefits since no income was reported. This means that your employer is not paying into your Social Security and doesn’t withhold money from your wages. As a result, you're not getting credit for your work. This will not only affect the check amount you receive during retirement, but it may also hinder your retirement plans and you may have to work your entire life.
- If you become disabled, you will have no benefits available to you.
- If your employer is audited and found to have tax problems, you risk being pulled in as a participant in tax evasion and fraud.
- Proof of income is required for business or personal reasons. Lack of which can result in being denied certain services. Examples of situations that require proof of income include student loan applications and refinancing, subsidized medical coverage, mortgage applications, insurance applications, and apartment rental and lease agreements.
- You're inviting income tax problems. It doesn’t matter how you earn your income, the IRS requires that you report all money you earn and pay the appropriate tax on it. If you don’t, it may result in penalties for failing to make estimated tax payments during the said year since your employer failed to withhold. If you don’t file returns at all, you risk facing failure-to-file penalties.
- You have no legal rights under the federal and state employment laws, meaning you may have no legal recourse if your employer discriminates against you or refuses to pay you overtime.
- You risk facing criminal charges for not paying taxes.
Paying Employees “Under the Table” Is Not Worth the Risk, After All
While getting paid under the table may feel like a win-win situation, one party is losing: the IRS. When the IRS loses, they don’t take it kindly. They will order an audit, and you can expect hefty fines if they discover any traces of tax evasion.
That’s not all. The audit could be retraced back to the beginning of your business, which will negatively affect your business entity. As a result, you’ll end up paying more than if you’d have reported all the transactions in the first place. Instead of cash payments, consider making direct deposits or paying employees in checks. This way, you are guaranteed a paper trail should the need arise.
If you feel the process of handling payroll is overwhelming, you can hire the services of a third-party payroll company to handle employee attendance tracking and payroll processing. Although these services will affect your bottom line, it will cost way cheaper than going through an IRS investigation or payroll audit.
Try Our Alternative Method…
A good company pays employees on time and keeps detailed records of payments. Luckily, you don’t need to hire a third-party company to manage your finances. Traqq offers a quicker and efficient method of employee payment processing. This tool, which also doubles as a project management software, ensures that every hour worked is recorded down to the minute, enabling 100 percent payroll accuracy.
Using this software means that the payment process will be well documented, and all records are retrievable whenever necessary. Traqq also allows employees to create invoices right within the app and send them to clients or employers.
Whether you’re an independent contractor, an employee, a freelance worker, or an employer, you don’t need to worry about going through the hassle of payroll processing every couple of weeks. Traqq’s automated tracking captures all the activities of the user, whether they are online or offline, making sure that all details are documented.
Apart from easy payment processing, this time tracking solution also allows you to view details of your activity, such as screenshots, time tracked, frequently used websites, and the percentage of time you were active. With such detailed stats, you can easily analyze and interpret the data and compare it to your productivity.