Employers have many options when it comes to paying employees. Some employees prefer direct deposit options, where money is deposited directly into their bank account. Other employees prefer to receive a paper check, so they can deposit their income manually.
Some employers might also be tempted to pay employees under the table. Payments made under the table are not subject to taxes or reporting, which can make unofficial payments seem like an attractive option for employers looking to save money.
However, employers caught paying employees under the table can be subject to several legal concerns. If convicted, these employers can face fines, penalties, and years in prison.
What Does It Mean to Get Paid Under the Table?
Employees who are paid under the table receive unrecorded payments in cash from employers. Since these payments are made off the books, the income is not eligible to be taxed. However, this is considered an illegal practice.
Small businesses may be tempted to utilize this practice if they’re also struggling with their finances. In other cases, businesses may choose to pay under the table for convenience.
Most commonly, businesses that commit this crime typically make a majority of their income in cash. They may find it easier to simply divide cash earnings up among employees, or they may not have time to record these divisions.
Businesses that pay employees under the table can face several legal issues. Employees who accept under the table payments are also subject to similar penalties, including fines and the possibility of prison time.
While employers can pay employees in cash, all payments must be reported to the IRS along with any other income. Under the table payments violate the Internal Revenue Code, enforced by the IRS.
Because these nondocumented payments are not subject to Medicare, Social Security, and other forms of payroll tax, they can qualify as a form of tax evasion. If the IRS determines that your under the table payments were made willfully, you and your business could incur criminal charges, fines, and loss of benefits.
You can avoid these penalties by fulfilling a legal payroll process. For example, a nursing staffing company processing payroll should first account for all taxes incurred during the pay period. In addition, the nursing staffing company will also have to satisfy any state and local tax payments when processing payroll.
After determining any tax withholdings, companies should process on-time payments for all employees. Employers should also file relevant taxes and pay for employee benefits. After companies complete the payroll process, they should update internal records and prepare for the next pay period.
Some nurse staffing companies can face issues processing payroll, given how long customers can take to return payment for services. Fortunately, payroll funding options can deliver necessary finances in days, to improve cash flow and make payroll possible.
Legal Repercussions for Employers
Employers who pay employees under the table can face a variety of legal consequences. Even a one-time occurrence of an undocumented payment can yield potential penalties, which can make it more difficult for companies to find future success.
If discovered by the IRS, employers who pay employees under the table can be convicted for tax evasion. If convicted, employers will be forced to pay back all taxes, plus fees. In addition, businesses can face stiff penalties that can affect their ability to operate in their industry. Business owners can even be subject to at least five years of prison time even after taxes are repaid.
Legal Repercussions for Employees
Similar to their employers, employees can also face consequences for accepting illegally paid funds. If the IRS elects to audit any employees receiving illegal funds, the under the table payments will likely be discovered. This can lead to prison time, penalties, and forced tax repayment.
Even if employers who pay employees under the table aren’t caught, they’re still hurting their workers. Since their income isn’t recorded anywhere, it cannot count toward a credit score, home loan application, or any other loan application.
Because under the table payments to employees don’t account for taxes, employees aren’t actively contributing to their own Social Security accounts. When it comes time for that employee to retire, they might receive less in retirement because of incomplete contributions made during their working years.
How Under the Table Payments Can Be Discovered
The IRS can discover under the table payments in a variety of ways. Sometimes, the IRS will actively search for under the table payments when they suspect that employers or employees are hiding income. In other cases, the IRS will inadvertently discover under the table payments during a routine audit process.
Sometimes, the IRS will take a closer look at any employee who files Form 4137, which allows for the repayment of Social Security and Medicare funds on tips that were not originally taxed. In other cases, the IRS might be tipped off by a disgruntled employee, or a tipster who discovered that an employee was receiving under the table payments.
The IRS also keeps comprehensive records on various industries, and constantly compares data points. If an employee’s finances don’t line up with other employees in the industry, or if an employer reports significantly fewer taxes than its competitors, the IRS might choose to investigate the situation.
Employers have several legal options when it comes to paying employees. As an alternative to under the table payments, consider paying employees through direct deposit or personal checks. You can still pay your employees in cash as well, as long as those cash payments are reported accurately to the IRS.
Companies with longer turnaround times between product sales and customer payments might face issues in processing payroll. To eliminate the waiting period before customers pay for goods, many companies take advantage of factoring. In particular, medical staffing and nurse staffing companies depend on factoring to satisfy a range of cash flow needs.
No matter the size of your business, it’s important to review revenue before and after each pay period. Take the time to understand your company’s financial situation — including your break-even point — to continually determine how to keep your company profitable.
Your company’s financial statements can help you make informed financial decisions, including the best ways to pay your employees. Review profit and loss statements for a detailed breakdown of any new income or costs during a specific pay period. Similarly, examine your cash flow statements to better understand how cash enters and leaves your company.