December 4, 2018
It’s common practice among a lot of small business owners to pay their employees in cash. Most of them are well-intentioned and are not trying to evade taxes or cheat the government. But even so, paying employees under the table is illegal and can lead to severe penalties and even jail time of up to five years.
What does it mean to pay someone under the table?
To put it simply, paying someone under the table means to pay them in cash. It is also known as unreported employment or off-the books.
However, there is a very important detail to be noted. It’s not illegal to pay employees in cash in itself, but if you are paying your employees in cash, you must report it to the Internal Revenue Service (IRS).
This must be done on a regular basis and in an accurate manner which includes deducting and depositing the amount of taxes to be paid.
Failing to do so (and if it is found out that it was intentional) would be considered tax fraud and you will be penalized.
The idea of not having to pay taxes and avoiding the hassle of paperwork can be attractive but it’s also a good idea to remember that businesses pay about $4.5 billion dollars in payroll tax penalties every year.
“Paying employees in cash adds a deep layer of complexity to managing payroll. You must be prepared to deduct the proper amount of payroll taxes as well as keep excellent records in case of an audit.” says Stéphanie McGuirt, Bookkeeper and Advisor.
Risks of paying employees under the table
Deciding to pay employees under the table can lead to a number of unfavourable consequences for you and your business. Following is a list of dangers you expose yourself to when you try to evade taxes or avoid paperwork:
- Penalties: If the IRS finds out that you are paying your employees in cash and failing to deduct the necessary taxes and also don’t have anything to prove otherwise, you can be forced to pay back all the money owed in taxes in addition to the interest and fines. The penalties usually end up being exponentially more than the money employers save by not paying taxes.
- Incarceration: If you are indulging in the malpractice of paying employees under the table, then according to IRS data, there is a 70% to 77% chance that you will be incarcerated. The average employer serves a jail time of anywhere from 14-months to two years for doing business off-the-books.
- Be put out of business: It’s common for hair-salons to pay their employees in cash and classify their employees as “independent contractors”. but the IRS calls this “misclassifying worker status”. The government has a checklist and criteria with which they can determine the worker status and may end up deciding against your favour, the results of which can be quite bad. The IRS can levy penalties, fines on you or worse, put your company out of business.
Is the juice really worth the squeeze?
The amount of money or effort saved by not paying taxes on employee salaries is quite underwhelming when you consider the number of risks that the business owner exposes him/herself to. For example, just a single phone call from an unhappy employee to the IRS can lead to you being in jail.
And it’s not like that there’s a lack of incentives for employees to become whistle-blowers. In fact, the IRS will reward employees up to $2,000,000 depending on the amount of assistance provided in the prosecution of an unlawful business owner.
Moreover, the identity of the employee will be kept confidential until the investigation is over and the charges have been pressed.
The IRS too is quite capable of finding employers who try to do indulge in activities like this. With a large number of statistical and social methods, the IRS can find regularities in business owners’ income and their lifestyle. Such irregularities can be the basis of an investigation which is sure to hurt you and your business.
It’s up to you at the end of the day
The truth is, it’s not illegal to pay your employees in cash but it’s also not in your favour as a business owner, no matter the how big your business may be, to indulge in malpractices such as this.
Chances are you’ll be caught and lose more money than you would’ve made from skipping out on paying taxes.
So if you have employees that are getting paid more than $1,800 a year, then go ahead and pay them using checks, direct deposit, or employees payroll cards or if it’s not feasible for your business to make payments in any form other than cash, make sure you hire an accountant and go through all the required legalities to avoid any future troubles.