Paying your employees under the table — that is, paying them in cash instead of via a formal paycheck — is particularly attractive to many small business owners for a number of reasons. It’s easy. It’s efficient. It’s faster than going through the more formal process required by Uncle Sam.
It’s also a very, very bad idea for a number of reasons that are certainly worth exploring.
Paying Employees Under the Table: Setting the Record Straight
First thing’s first: Regardless of the type of business you’re running or even the industry that you’re operating in, under no circumstances is paying your employees in cash under the table legal.
Note that this does not mean that it’s illegal to pay your employees in cash — if that’s what you want to do, that’s absolutely fine. But you still need to report those payments to the IRS and withhold all associated taxes. The former is a strikingly different situation from the latter in the eyes of the Internal Revenue Service.
Paying under the table means that taxes aren’t being withheld from your employee’s paychecks, which also means you’re not filling out tax forms for these people. Wages aren’t recorded via a W-2 form, and at that point, you’re in breach of your legal responsibility to obtain necessary elements like disability and workers’ compensation insurance.
In short, you’re intentionally refusing to comply with various state and federal employment laws, and you also happen to be participating in one of the top types of employment tax non-compliance at the exact same time.
But even after all of that, you still might be one of those employers who thinks that this type of thing is a good idea. “Big risk, big reward” — right?
Not exactly.
The Consequences Are as Immediate as They Are Severe
Failing to comply with any and all employment tax obligations is a civil crime, yes — but it’s also a criminal matter, too. The IRS and the Department of Justice have made it very, very clear that this is something they take seriously — and they will not hesitate to prosecute you if and when you get caught.
Just a few examples of the types of situations that could land you in hot water with the IRS include, but are not limited to, ones like:
For the sake of an example, let’s say that you’re paying employees under the table purely to avoid taxes — you don’t have any other larger, more nefarious plots in mind. In that case, you’re still likely to get hit with fines and restitution payments, a loss of benefits eligibility and criminal charges.
To speak to that last point first, it’s important to note that employment tax evasion defendants generally don’t do too well when defending their case in a court of law. The incarceration rate is almost laughably high, from between 70 to 77 percent, according to IRS data. The average prison sentence lasts between 14 months and two full years.
Reporting payments and paying your taxes probably don’t look too bad at that point; do they?
Your employees aren’t off the hook in this scenario, either. While you’re likely to go to prison and get hit with massive fines, your employee will probably lose his or her eligibility for Social Security Disability and workers’ compensation benefits forever.
All of this is to say that the next time you think it might be a good idea to save a little money by paying your employees in cash under the table...
... don’t.
Sonu Shukla, CPA writes for CountingWorks, an accounting news and advice website. Reach his office at [email protected].
About Sonu Shukla, CPA, CFP
Sonu Shukla is a Certified Public Accountant as well as Certified Financial Planner. He believes in proactive tax planning and has the skills, education and experience to demonstrate passionately planned financial strategies. His firm tailors highly efficient tax plans for his small business clients, all in a one on one environment where he and the client can bounce ideas around until every detail is worked out. Located in Orlando, FL, he services all of Florida.
