Armanino Blog

Why You Really Shouldn't Pay "Under the Table"

by Jenn McCabe
September 25, 2018

Thinking of paying someone cash or wages off the books? Just don't. For starters, you can't take the tax deduction if you don't have the expense properly documented. And, it's illegal.

These are good reasons for compliance, but many employers are still tempted to ignore the rules. Here are some common excuses for not putting someone on payroll or reporting wages―and why these excuses won't fly.

Payroll accounting is too difficult. Oh, c'mon. There are many affordable payroll services available. And if you get audited, it's hard―and expensive―to go back to recreate several years of records and tax returns.

It's standard practice in certain industries. Really? You're using that? These industries (landscaping and construction, for example) are well known by the authorities. Getting caught can result in unplanned fines and interest. And in the long run, your business will attract better workers and be more competitive if you're treating people fairly.

My business can't afford to pay the tax. This sounds like a revenue problem...Paying under the table is actually more expensive when you consider the tax deduction lost and the cost of fines on top of taxes if you're caught.

My employees asked for cash and didn't want taxes withheld. You're the boss! It's not up to them. The risk is all on you.

So how do you get caught? It's easy. Say a worker is still eligible for unemployment benefits, or for workers compensation or disability. When they file claims, they name their last few employers (that's you), and the dominos start falling.

In the meantime, when employers don't pay their share of taxes, other taxpayers have to pay more to cover the shortfall in tax revenue. That revenue goes to pay for schools and law enforcement, not just disability and unemployment.

Let's finish with the selfish reason to comply with the rules: You want the tax deduction. Even assuming you don't get busted, if you pay a worker under the table or "unreported" wages, you're essentially paying their taxes for them. You'll pay tax on the money you make, and on the money they make.

That's just not good business decision-making, and it's horrible tax planning.

For more information, contact our HR Solutions experts.

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Jenn McCabe - Partner, Outsource HR - El Segundo CA | Armanino
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