Do you pay your employees under the table?
We get it. It's simpler for you to just hand over cash once a week. You won't have to bother with record keeping, deducting taxes, reporting income. You even think you're doing your employee a favor because she gets to keep her whole paycheck.
But, if you're found out, the penalties and punishments for unreported employment (also known as under the table employment) may cost you more money and hassle than if you had done everything by the book.
So, how much trouble are under the table employees?
If you pay an employee at least $1,800 in a year, you are required to pay employment taxes.
If you don't withhold your employees' wages to pay federal income and FICA taxes, you could be personally liable for the whole amount. This means you'll have to pay nearly $80 for every $500 your employees earned. It would have been cheaper for you if you had just withheld the amount from your employees' wages.
If the IRS found out that you have not been reporting employee income and withholding and paying the proper taxes, you can expect severe civil penalties and even possible criminal prosecution. In 2013, the IRS assessed nearly $4.5 billion dollars in penalties to employers who failed to pay employment taxes and accurately report employee income. The IRS also indicted nearly 4,000 people for various tax crimes, convicted over 3,000 people, and incarcerated about 2,200 people.
State Tax Penalties
In addition to IRS penalties, if caught, you'll have to pay state penalties as well.
For example, in California, an employer who complies with reporting requirements would only have to pay unemployment insurance (UI) and employment training tax (ETT) on up to $7,000 of wages per employee, even if the employee earned much more than $7,000.
But, an employer audited for not properly reporting employee income and paying the required taxes would have to pay UI/ETT on employees' total income, state disability insurance (which is normally withheld from the employee), personal income tax, a 130 percent penalty, a non-registered penalty, and interest.
Bottom line: under the table employees are not worth the potential legal trouble, hassle and money.
If you're being audited by the IRS or your state's tax agency for not reporting employee income or paying under the table, consult with an experienced business attorney for help.