The term “paying under the table” is a colloquial expression for paying an employee in cash, without reporting the payments to the Internal Revenue Service (IRS). This practice is frequently utilized by well-intentioned business owners who mistakenly assume that paying in cash will save themselves and their employees the hassle of tedious tax paperwork, while increasing the ease and efficiency of business operations. Unfortunately for both employers and employees, the opposite is true: contrary to saving time or money, making or receiving payments under the table can result in a host of costly consequences for both parties. If you are a California business owner or employee who has concerns about under-the-table compensation, employment tax compliance, or related tax and accounting matters, consult with an experienced Sacramento business accountant from Cook CPA Group for personalized financial guidance.
Is it Illegal for Employers to Pay Employees “Under the Table” Using Cash?
It is perfectly legal for an employer to pay his or her employees using cash, with one major caveat: such payments must be reported to the IRS in a timely and accurate fashion. An employer’s failure to report employee wages is going “under the table” or “off the books,” which constitutes a serious violation of the Internal Revenue Code (IRC). As such, there can be grave consequences for both employer and employee. However, before our Roseville business consultants discuss these consequences, let’s take a step back and explain why it is unlawful to make payments off the books.
Employers are required to deposit and withhold a variety of employment taxes, regardless of whether employees are paid in cash or by other means, such as direct deposit. To provide a few examples, employers are generally required to withhold the following from wages paid to their employees:
- Federal Income Taxes – Like the payroll taxes described below, federal income taxes must be withheld from employee wages and deposited by employers.
FICA Taxes – Under a federal law called the Federal Insurance Contributions Act, or FICA, employers must (1) withhold and deposit Social Security and Medicare taxes, and (2) match the amounts withheld. FICA withholdings are also referred to as “payroll taxes.”
- Employers should be made aware that an Additional Medicare Tax must be withheld from employee wages that exceed certain thresholds, which can be viewed here.
Employers can use Form W-4 (Employee’s Withholding Allowance Certificate) to determine how much tax should be withheld.
By paying employees under the table, employers effectively avoid paying taxes. Depending on whether the conduct was “willful” (intentional) and other factors, this may constitute employment tax evasion, which is a form of tax fraud – and a serious criminal offense.
What Are the Penalties for Paying Workers Under the Table?
Depending on the circumstances, there can be myriad consequences for employers and employees who make or receive payments under the table, all of which can have long-lasting negative effects. Examples of potential outcomes include, but are not limited to, the following:
- Criminal Charges – Employers risk being investigated by the IRS Criminal Investigation Division and recommended to the Department of Justice (DOJ) for prosecution. According to IRS data, employment tax evasion defendants have a high incarceration rate anywhere from approximately 70% to 77%, with the average prison sentence served to range anywhere from 14 months to two years.
- Fines and Restitution – In addition to being sentenced to prison, employers also risk receiving massive criminal fines or being ordered to pay restitution.
- Loss of Benefits Eligibility – An employee who is paid under the table risks losing his or her eligibility for Social Security Disability benefits and, in the event of a work-related accident, workers’ compensation benefits.
Small Business Accounting and Tax Services in Sacramento and Roseville, CA
As the IRS notes in one publication, “Paying employees, whole or partially, in cash is a common method of evading income and employment taxes resulting in lost tax revenue to the government and the loss or reduction of future social security or Medicare benefits for the employee.” Not only is this a serious offense – it also has a high likelihood of detection by the IRS, which uses increasingly sophisticated software to identify financial discrepancies and irregularities. At particular risk are cash-intensive businesses, such as convenience stores, liquor stores, parking garages, restaurants, and vending machine operators, to which the IRS pays special attention due to the high potential for noncompliance with the Internal Revenue Code.
If you own or operate a cash-intensive business, have paid employees under the table, have accepted under-the-table compensation from your employer, or have questions about how to comply with employment tax requirements, it is in your best interests to review your options with an experienced Sacramento small business accountant or Sacramento business tax preparer as soon as possible in order to reenter compliance and mitigate potential penalties. To schedule a free consultation, contact Cook CPA Group online or by calling our California accounting firm at (916) 724-1665 right away. We serve corporations, limited liability companies (LLCs), partnerships, sole proprietorships, and individual taxpayers throughout a diverse array of industries in the Sacramento-Roseville area.