If You Pay Your Employees Under the Table Here is What You Need to Know

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If you are the owner of a business and you are paying your staff cash under the table, what consequences could you face if caught?

First of all, you may think that no one will ever find out. (Maybe it was supposed to be your little secret.) But what if you are audited by the IRS? Or even worse, one of your workers that you are paying on the table may get in trouble with the IRS and tell them about your arrangement. In either situation, the IRS is going to require you to prove where your money has been going.

So, here are two questions for you: Who? And how much?

Bottom Line Rule #1:

The IRS wants to tax someone on all wages deducted from your business tax return. If you paid someone and deducted those payments from your business income, then the IRS wants to know who was paid. You see, the IRS will want to confirm whether that person(s) reported and was taxed on your cash payments income.

The IRS will try to confirm who is this person(s). And as you learned from my previous article, the government wants information that is independently verifiable. That creates a problem if you paid workers, undocumented or otherwise, because that person(s) may be “apprehensive” about admitting to the IRS that it received taxable cash income and that it failed to report the income as taxable.

Bottom Line Rule #2:

Then the government wants you to prove how much you paid the worker(s). This part is also difficult. Here’s why.

Because almost no one issues receipts for payments in cash, you may likely have no record of your payment. In that case, proving an amount paid depends on whether your patterns closely suggest the cash payments. Note that payments through pay applications like Zelle, CashApp, and Venmo do provide some helpful information in these cases.

Of course, a statement from the person(s) who received payments is very good evidence. But again, that person may (very likely) be “troubled” with admitting to the IRS that he received a certain amount of taxable income and that he underreported his income. Facts.

The IRS wants to tax someone for all wages paid. It’s either the worker, or you.

During an audit, if you can’t prove who and how much was paid, then IRS will treat every dollar that you have paid to someone else as your own profit. Since you know that the person you are paying under the table isn’t going to report the payments on their taxes all that money is going to be recorded as YOUR income. That is NOT going to result in a good outcome for you.

Even worse, if you paid more than $600 to anyone, then you should issue a Form 1099-NEC or 1099-Misc to that person. Failure to do so results in penalties, and a nightmare situation with the IRS. Or it could result in your having a payroll tax problem (because no payroll taxes were ever paid.)

How do you protect yourself?

The facts are different for everyone. But we’ll discuss that in another article. So, stay tuned.

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