Fraud to Watch For: Under-the-table wages

Fraud to Watch For: Under-the-table wages

When you're reviewing your payroll numbers, be sure you have all the figures in front of you. If you don't, someone may be getting paid under the table - and that can spell big trouble for you and your employees.

In the first two months of 2005, federal authorities charged two groups of employers in Massachusetts with paying more than $33 million in under-the-table wages in an effort to avoid taxes and reduce insurance premiums. The business owners are alleged to have concealed true payroll amounts from the IRS and their workers’ compensation insurance companies. If convicted on all counts, some of 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 true that compliance with payroll requirements is time-consuming, complicated and expensive. It’s also true that, in some industries, under-the-table wages are becoming a standard business practice. In many cases, workers prefer to be paid in cash.

When those employees get caught, however, they are liable for income tax audits and payments — without any W-2s or pay stubs to prove how much they earned. They’ll pay all the taxes they would have paid on reported income, and they may not qualify for Social Security, Medicare, unemployment or workers’ compensation benefits.

All things considered, when it comes to payroll, companies are much better off putting everything on the table rather than attempting to save money by passing cash under it.