To “pay someone under the table” means that an employer pays an employee cash without making the deductions required by law. Federal, state, and local laws require employers to take deductions for income tax, Social Security taxes, and Medicare withholdings. Other deductions may be required, such as wage garnishment withholdings to pay past due child support and other legitimate debts.
This means that the business is not deducting taxes from the employee’s paycheck, and as such, the Internal Revenue Service (IRS) is unaware of the employee and their employment status. It also means that social security taxes, unemployment insurance, and workers’ compensation insurance premiums are also not being paid.
What Are the Consequences for Illegally Paying Employees “Under the Table?”
There are many reasons employers give as to why they pay their employees under the table. The employer may want to avoid the hassle and expense of doing payroll every two weeks. Or, they say they cannot afford payroll taxes and insurance. Regardless of the reason, paying someone under the table is illegal.
Many employers believe they will not be caught for illegally paying employees under the table, but the IRS collects roughly $4.5 billion in penalties for the non-payment of payroll tax annually. The penalties for paying wages under the table can be much more expensive than just paying back what is owed. The IRS prosecutes these cases, many of which earn a perpetrator a prison sentence, along with severe financial penalties.
For instance, a business owner in New Jersey paid his employees under the table in order to avoid paying $152,000 in payroll tax from 2005 to 2008. He was caught and sentenced to two years in prison and payment of a fine of $1.8 million to the IRS. Additionally, businesses can lose their operating license, future loan and credit applications may be affected, and civil charges may be filed on top of criminal charges, including a possible charge of tax evasion.
What Are Some Defenses Employers Have to “Under the Table” Charges?
An employer who is accused of paying employees under the table would be wise to consult an attorney. The IRS takes willful fraud seriously. However, if it can be shown that the employer was acting in genuine negligence, they may be able to pay a fine rather than spend time in jail. Paying employees in cash is perfectly fine, but the employer must comply with federal, state, and local laws regarding withholdings and paying payroll taxes, unemployment insurance, and workers’ compensation laws.
People make mistakes, and mistakes are not necessarily fraud. An experienced attorney may be able to defend against an IRS investigation, resulting in the payment of any money owed and a fine. It is also possible to challenge the IRS based on insufficient evidence, as well as an elapsed statute of limitations on tax evasion, which is usually six years.
How Do I Report My Employer for Paying Under the Table?
A person or a business is legally required to withhold taxes from their employee’s wages and to contribute tax payments to federal, state, and local tax authorities.
The following are some of the employment taxes for which employers are responsible:
- Federal, state, and local income taxes;
- Social Security and Medicare taxes (referred to as “FICA tax”);
- Federal and state unemployment taxes
- State-specific taxes.
An employer must withhold federal, state, and local income taxes, Social Security and Medicare taxes, and some state-specific taxes from employee wages on a regular basis. Employers must also contribute payments to Social Security, Medicare, state unemployment funds, and other state-specific taxes in their state.
An employer should set aside the funds they withhold and taxes they need to deposit with government agencies. Then, they need to deposit payroll taxes with the appropriate authority, e.g., the IRS, according to their depositing schedule. The schedule for depositing federal income, Social Security, and Medicare taxes is usually monthly or semiweekly.
An employer’s schedule for making deposits is based on a four-quarter IRS lookback period. An employer should deposit federal unemployment tax every quarter, i.e., every 3 months.
An employer needs to contact their state unemployment agency and state taxing authority to find out what their state schedule is for making deposits.
It can become complicated, no doubt, but ignoring these legal obligations is a bad idea. There are many businesses that offer payroll services that an employer can hire to take care of these responsibilities for them.
A person can report another person or entity for failing to comply with tax law. They would use IRS Form 3949-A, Information Referral, if they know or suspect that some person or business is not complying with the tax laws. The form can be submitted online or by mail. The IRS does not report tax law violations by telephone.
The IRS keeps the identity of a person who reports a suspicion confidential. The person does not receive updates or status reports because tax returns are confidential. But the IRS does investigate reports, so if someone is not reporting and paying what they owe, a person can be confident that the IRS will figure it out.
Tax fraud includes the following:
- Claiming false exemptions or deductions;
- Paying kickbacks;
- Submitting false or altered documents;
- Failing to pay taxes owed;
- Failing to report income;
- Engaging in organized crime;
- Failing to make required withholdings;
- Failing to comply with tax laws.
The IRS collects penalties for late payment of payroll taxes according to a chart that is publicly available. If a person pays 1 to 5 days late, the penalty is 2% of the amount owed. If a payment is 6 to 15 days late, the penalty is 5% of the amount owed. If the payment is 16 days late, the penalty is 10% of the amount owed.
Penalties are not the only problem an employer would have if they miss the deadline for a payroll tax deposit. They would also have to pay interest on any unpaid amount they owe. That interest rate could range from 3% to 6% of the amount owed.
It is important to keep in mind that these are penalties for not paying payroll taxes. There are additional penalties for late reporting.
In addition, if a person does not pay the IRS what they owe, the IRS could place a tax lien on their real and personal property, e.g., a house or a car. And ultimately, If the IRS thinks a person is purposely evading taxes, a person might be prosecuted for tax evasion. The punishment for tax evasion is a fine of not more than $100,000 or $500,000 in the case of a corporation or imprisonment for a maximum term of 5 years.
Do I Need a Lawyer?
If you are facing an IRS investigation regarding paying employees under the table, you should speak with an experienced employment lawyer as soon as possible.
Defending against the IRS on your own is incredibly difficult, and having an experienced lawyer by your side is invaluable. Your attorney will advise you of your rights, help you build your case, and represent your best interests in court if that should become necessary.
