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.
Employers justify paying unreported cash wages for several reasons. For example, they may avoid tax and insurance expenses associated with payroll, and it reduces bookkeeping burdens. They may think it creates a competitive advantage, and sometimes employees request no withholdings.
"Many people don't think there's anything wrong with paying under-the-table wages," said Annie Yoder, CPA, CFE, CFF, senior manager, New Philadelphia office. "However, there are many risks involved with this dubious activity that do not benefit the company in the long run."
First and foremost, paying under the table is against the law, and you could be criminally prosecuted. In 2005, federal authorities charged two groups of employers in Massachusetts with paying more than $33 million in unreported wages. The defendants faced 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," Yoder said.
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.
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, you're responsible to your community," Yoder explained. "Untaxed wages create a burden on taxpayers to support public services such as schools, law enforcement and state-funded programs."
Ultimately, under-the-table wages do not 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," Yoder concluded. "Anything else is simply not worth the risk."
This article was originally published in The Rea Report, Fall 2006.
Note: This content is accurate as of the published date above and is subject to change. Please seek professional advice before acting on any matter contained in this article.