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The Costs of Paying Under the Table

by | Jun 27, 2024 | Employment Tax Law, Tax Law, Tax Mistakes |

Paying an employee under the table with cash can seem attractive to employers. They avoid having to pay federal and state withholding taxes, benefits packages that typically amount to 30-40% of an employee’s salary, and FICA (Social Security and Medicare taxes). In addition, if they hide the employment altogether, they do not have to worry about firing an employee and being subject to state unemployment rates being hiked up. They also avoid their workers’ compensation and disability obligations. 

This arrangement can seem attractive to employees as well. They have no deductions from their pay for withholding or FICA and they may believe their compensation to be higher because their employer will not be paying benefits (a perception that is not necessarily correct).

The under-the-table cash payment arrangement may sound like a win-win for employers and employees. More often than not, it turns out to be a lose-lose. If you are an employer either considering paying under the table or you have been doing so already, you need to contact an experienced tax lawyer right away. 

Consequences for Employers Paying Under the Table

Paying employees under the table is illegal. If you fail to withhold taxes, you are committing tax fraud. If the IRS audits your business and discovers the fraud, you can face severe penalties:

  • Paying back all the money owed plus interest and penalties
  • Fines of up to $100,000.00
  • Jail time of up to 5 years

Consequences for Employees Being Paid Under the Table

It is illegal for employees to fail to file and pay their income taxes. They can face stiff penalties:

  • Paying back all the taxes they owed plus interest and penalties
  • Inability to claim workers’ compensation if they are injured
  • Inability to claim unemployment insurance if they are fired (or if their employer goes out of business)
  • Loss of future Social Security and Medicare benefits

Paying Employees in Cash Legally

If you have decided that paying one or more of your employees in cash makes sense for you, you can do so legally. Following are some suggestions to stay compliant with the law:

  • Keep detailed records
  • Calculate and withhold tax payments and deductions accurately
  • Pay payroll taxes accurately and on time
  • Track employee work hours
  • Pay employees regularly
  • Set up a separate bank account for cash payroll payments
  • Make sure employees sign when they receive payments
  • Keep track of tips if your business involves services where gratuities are customary or expected

Protect Yourself, Your Employees, and Your Company

Paying under the table is a common mistake many employers make. If a business finds itself in trouble for paying employees under the table, the consequences are severe. It’s crucial for both parties to adhere to legal payment practices, keep detailed records, and fulfill tax obligations to avoid these costly repercussions. Consulting with an experienced tax lawyer can help you navigate these issues and help you face the law with confidence.

Using our more than 30 years of experience, Kundra & Associates has provided clients in the Bethesda, Arlington, Rockville, Alexandria, and Washington D.C. areas—as well as aboard—with the tax law help they need. If your business has committed tax fraud or needs guidance facing another area of tax law, call us at 301-750-9717 or contact us online.

 

tax law