Viewpoints

The Dangers of Paying Under the Table

Steven Terrigino

Originally Published In:
April 2008
Author: Steve Terrigino, CPA

It’s not a surprise to many people that some workers are paid “under the table.” It’s a common practice in industries using temporary workers, such as construction, repair and other trades.

It's no wonder business owners want to 'pay cash' or treat workers as contractors. Complying with the federal and state payroll requirement is complicated and expensive. It reduces bookkeeping burdens. There are tax withholdings, tax forms and deadlines, FICA (Social Security) and unemployment to pay, plus the cost of workers compensation insurance.  Tax authorities are extremely inflexible about deadlines and the penalties for noncompliance are stiff.

Some business owners may think that paying under the table creates a competitive advantage, and sometimes employees request no withholdings. 
While many people don’t think there’s anything wrong with paying under-the-table wages, there are many risks involved with this dubious activity that will not benefit your company in the long run.

First and foremost, paying under the table is against the law, and you could be criminally prosecuted. Just last year, federal authorities charged two groups of employers in Massachusetts with paying more than $33 million in unreported wages. If convicted on all counts, the defendants face possible sentences of up to 57 years in prison and $750,000 in fines.

Even when payrolls aren’t in the millions, the cost of paying with unreported cash can be significant.

As an employer, you can be personally liable for all federal income and FICA taxes you don’t withhold from your employees’ wages. For every $500 you pay in wages, you owe $76.50 in withholding, making your potential liability significant, even without interest, late penalties and possible criminal penalties that may include jail time. And that doesn’t even begin to consider the $50 fine for every W-2 form you fail to file or the state penalties that may accrue.

It’s also irresponsible.

Even if your workers request under-the-table payment, you should decline, explaining that it hurts them as well. Workers are subject to state and federal income tax audits for not reporting wages. And, if they ever need to collect Social Security or file unemployment, workers’ compensation, or disability claims, their benefits may be delayed or denied because they won’t have check stubs, W-2s or a way to verify their earnings.

Beyond your responsibility to your workers, employers have a responsibility to the community. Untaxed wages create a burden on taxpayers to support public services such as schools, law enforcement and state-funded programs.

Furthermore, paying under the table wages can be costly. There is a misperception that paying under-the-table wages will save you money. Whether it results in a costly penalty or reduced tax deductions, the result may not be what you had hoped.

The survival of your business requires you to follow compensation requirements. Anything else is simply not worth the risk.

Disclaimer: The Bonadio Group provides the information in Viewpoints for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in Viewpoints are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.