Employers have many options when it comes to paying employees. Some employees prefer direct deposit options, where money is deposited directly into their bank account. Other employees prefer to receive a paper check, so they can deposit their income manually.
Some employers might also be tempted to pay employees under the table. Payments made under the table are not subject to taxes or reporting, which can make unofficial payments seem like an attractive option for employers looking to save money.
However, employers caught paying employees under the table can be subject to several legal concerns. If convicted, these employers can face fines, penalties, and years in prison.
What Does It Mean to Get Paid Under the Table?
Employees who are paid under the table receive unrecorded payments in cash from employers. Since these payments are made off the books, the income is not eligible to be taxed. However, this is considered an illegal practice.
Small businesses may be tempted to utilize this practice if they’re also struggling with their finances. In other cases, businesses may choose to pay under the table for convenience.
Most commonly, businesses that commit this crime typically make a majority of their income in cash. They may find it easier to simply divide cash earnings up among employees, or they may not have time to record these divisions.
Legal Considerations
Businesses that pay employees under the table can face several legal issues. Employees who accept under the table payments are also subject to similar penalties, including fines and the possibility of prison time.
While employers can pay employees in cash, all payments must be reported to the IRS along with any other income. Under the table payments violate the Internal Revenue Code, enforced by the IRS.
Because these nondocumented payments are not subject to Medicare, Social Security, and other forms of payroll tax, they can qualify as a form of tax evasion. If the IRS determines that your under the table payments were made willfully, you and your business could incur criminal charges, fines, and loss of benefits.
You can avoid these penalties by fulfilling a legal payroll process. For example, a nursing staffing company processing payroll should first account for all taxes incurred during the pay period. In addition, the nursing staffing company will also have to satisfy any state and local tax payments when processing payroll.
After determining any tax withholdings, companies should process on-time payments for all employees. Employers should also file relevant taxes and pay for employee benefits. After companies complete the payroll process, they should update internal records and prepare for the next pay period.
Some nurse staffing companies can face issues processing payroll, given how long customers can take to return payment for services. Fortunately, payroll funding options can deliver necessary finances in days, to improve cash flow and make payroll possible.
Legal Repercussions for Employers
Employers who pay employees under the table can face a variety of legal consequences. Even a one-time occurrence of an undocumented payment can yield potential penalties, which can make it more difficult for companies to find future success.
If discovered by the IRS, employers who pay employees under the table can be convicted for tax evasion. If convicted, employers will be forced to pay back all taxes, plus fees. In addition, businesses can face stiff penalties that can affect their ability to operate in their industry. Business owners can even be subject to at least five years of prison time even after taxes are repaid.
Legal Repercussions for Employees
Similar to their employers, employees can also face consequences for accepting illegally paid funds. If the IRS elects to audit any employees receiving illegal funds, the under the table payments will likely be discovered. This can lead to prison time, penalties, and forced tax repayment.
Even if employers who pay employees under the table aren’t caught, they’re still hurting their workers. Since their income isn’t recorded anywhere, it cannot count toward a credit score, home loan application, or any other loan application.
Because under the table payments to employees don’t account for taxes, employees aren’t actively contributing to their own Social Security accounts. When it comes time for that employee to retire, they might receive less in retirement because of incomplete contributions made during their working years.
How Under the Table Payments Can Be Discovered
The IRS can discover under the table payments in a variety of ways. Sometimes, the IRS will actively search for under the table payments when they suspect that employers or employees are hiding income. In other cases, the IRS will inadvertently discover under the table payments during a routine audit process.
Sometimes, the IRS will take a closer look at any employee who files Form 4137, which allows for the repayment of Social Security and Medicare funds on tips that were not originally taxed. In other cases, the IRS might be tipped off by a disgruntled employee, or a tipster who discovered that an employee was receiving under the table payments.
The IRS also keeps comprehensive records on various industries, and constantly compares data points. If an employee’s finances don’t line up with other employees in the industry, or if an employer reports significantly fewer taxes than its competitors, the IRS might choose to investigate the situation.
Alternative Options
Employers have several legal options when it comes to paying employees. As an alternative to under the table payments, consider paying employees through direct deposit or personal checks. You can still pay your employees in cash as well, as long as those cash payments are reported accurately to the IRS.
Companies with longer turnaround times between product sales and customer payments might face issues in processing payroll. To eliminate the waiting period before customers pay for goods, many companies take advantage of factoring. In particular, medical staffing and nurse staffing companies depend on factoring to satisfy a range of cash flow needs.
No matter the size of your business, it’s important to review revenue before and after each pay period. Take the time to understand your company’s financial situation — including your break-even point — to continually determine how to keep your company profitable.
Your company’s financial statements can help you make informed financial decisions, including the best ways to pay your employees. Review profit and loss statements for a detailed breakdown of any new income or costs during a specific pay period. Similarly, examine your cash flow statements to better understand how cash enters and leaves your company.
Frequently Asked Questions
When Does It make Sense To Pay Under The Table?
Generally speaking, it rarely makes sense to pay someone cash under the table. Here’s why:
- Legal Consequences: Paying employees under the table is illegal in most jurisdictions. It can lead to severe penalties, including fines, legal actions, and damage to your business reputation. Adhering to the law ensures compliance and maintains the integrity of your business.
- Financial Risks: By paying employees off-the-books, you may evade certain financial obligations, such as payroll taxes, social security contributions, and other benefits. However, these obligations exist to protect employees and provide them with essential rights and benefits. Neglecting these obligations may harm your employees and create long-term financial risks for your business.
- Employee Rights and Protections: Paying employees under the table denies them the benefits and protections they are entitled to. Regular employees receive contributions towards retirement funds, healthcare plans, and unemployment benefits. On top of that, they are covered by employment laws, including minimum wage requirements and protection against unfair treatment. By paying under the table, you potentially expose your employees to financial insecurity and limits their access to legal protections.
- Insurance Coverage: When paying employees off-the-books, they might not be covered by certain insurance policies, such as workers’ compensation insurance. This places both the employee and the employer at risk. If an employee gets injured on the job, they may not have access to the necessary assistance and compensation, leaving you liable for potential lawsuits and expenses.
- Lack of Transparency: Paying employees cash under the table lacks transparency, making it difficult to track financial records accurately. This can cause issues during tax season, making it challenging to report accurate income and expenses. Proper financial management is crucial for the growth and stability of any business, and paying employees off-the-books can impede this process.
While there may be rare exceptions or unique circumstances where paying cash under the table seems tempting, it is generally advisable to avoid engaging in such practices. It is essential to prioritize legal compliance, employee rights, financial stability, and transparent business operations for the long-term success of your business.
What Happens If An Employee Gets Injured While Working Illegally?
When an employee gets injured on the job while working illegally, it creates significant challenges not only for the employer but also for the employee themselves. Without the proper documentation and records, such as payment history, the employee may face difficulties in receiving the necessary compensations from organizations like WSIB or WCB. In the absence of these records, the employee’s options become limited.
If the injury is a minor one, the employee may be left without any means of compensation or financial support to cover their medical expenses or time off work. On the other hand, if the injury is more severe and life-changing, the consequences become even more dire. Without access to proper insurance or benefits, the injured employee may find themselves in an extremely difficult situation.
In such circumstances, the only available option for the employee could be to take legal action against the employer and their business. The employee would need to navigate complex legal procedures and fight for their rights, which can be a time-consuming and emotionally draining process.
In the meantime, the injured employee would also have to figure out how to manage their day-to-day expenses, such as rent and groceries, without any regular income. This financial strain can further worsen the already challenging situation they find themselves in.
Engaging in illegal work can have severe consequences for both the employee and the employer. It is important to note that attempting to manipulate the system by working illegally can lead to negative outcomes, leaving both parties in distress and facing potential legal ramifications.
Why Would Someone Ask For Cash?
The reasoning behind individuals seeking a cash arrangement can be attributed to various circumstances. Firstly, there are some who have a strong aversion to paying taxes, as it can often be perceived as burdensome. Particularly in countries like Canada where tax rates can be quite high, many individuals might be motivated to avoid this financial obligation.
Secondly, those who are recipients of government benefits such as Employment Insurance (EI), social assistance, or disability support may face limitations on how much they can earn. Once their income exceeds a certain threshold, it can be deducted from their support payments. Consequently, some individuals might prefer to receive cash under the table in order to avoid this reduction.
Thirdly, some people consciously choose to remain off the radar and keep their income undisclosed to governmental authorities. This could be due to various personal circumstances, such as having outstanding debts for child support, being involved in a legal dispute or lawsuit, or simply wanting to supplement their income discreetly. In such cases, individuals seek to withhold information about their earnings from the public as well as from specific individuals who may have the authority to garnish their wages.
Overall, individuals who pursue cash arrangements generally have a common desire to maintain control over their wages and restrict the sharing of this financial information with anyone else, be it government entities or private individuals.
How Does Not Declaring Income Affect Business Expenses?
Not declaring income can have significant implications for business expenses for employers. One major consequence is that expenses that are not documented and included in the books cannot be considered legitimate business expenses. This means that if income is not declared, any corresponding expenses cannot be claimed and deducted. It may seem like a simple solution to declare expenses without the employee declaring income, but this is not advisable or ethically sound.
Operating under the table, without declaring income, means that you are sacrificing one of your major legitimate expenses. The employee’s attempt to avoid paying taxes by not declaring income can ultimately lead to you paying additional taxes. Without being able to make expenses legitimate, the extra cash required to pay employees remains a challenge. While relying on cash from customers may have been a feasible solution in the past, it has become increasingly difficult in today’s technology-driven world.
Even if you manage to receive cash sales, once you declare them as part of your business, the money becomes subject to taxation. The dilemma then arises of how to withdraw that cash to pay employees without alerting the authorities. You may consider paying the additional cash to yourself, but this would subject you to personal taxation. Alternatively, you could try diverting the cash through other expenses, hoping to avoid detection. However, if caught, you would face severe penalties, including expensive and time-consuming audits and possible legal consequences.
Furthermore, engaging in such practices runs the risk of losing the trust and services of your bookkeeper or accountant. Professionals in the field prefer to maintain ethical standards and may discontinue their services upon discovering fraudulent activities. Additionally, attempting to manipulate the system by voiding bills and keeping cash can lead to even bigger problems. It entails not reporting sales tax, revenue, and payroll tax, putting yourself in a precarious position. In the past, businesses with heavy cash transactions like restaurants often resorted to such practices, tarnishing their reputation in the financial lending world.
