Is it Illegal to Pay Under the Table Wages?

Dejan Ristovski/iStock/Getty Images

The term, being paid under the table, is used so commonly and matter-of-factly that a person might wonder whether this practice is legal. In case you haven’t heard this term, or don’t know what it means, being paid under the table or paying under the table wages is a way to accept or pay money, usually in cash, to get around paying income tax or payroll tax. The Internal Revenue Service calls this practice the underground economy. Employees accept under the table wages to avoid paying the taxman, and employers who pay this way, don’t pay their allotted taxes, either.

Under the Table

Paying a nanny under the table is illegal.
Neeley Spotts/iStock/Getty Images

When the economy is sluggish, more people work under the table, and more people are tempted to pay workers this way to get work done for less money. Typical businesses that operate under the table are used car sales, child care, housecleaning, pet sitting, tree trimming and construction. If you hire a nanny to watch your child in your own home, for example, and pay her $1,700 or more per year, as of 2010, without completing the tax-related paperwork, you are breaking the law. If your nanny decides to file for Social Security later, claiming earnings from her job working for you, the IRS will hold you liable for your unpaid taxes, and will charge you interest and penalties on top of that.

Paying Taxes

Apply with the IRS for an EIN.
stevanovicigor/iStock/Getty Images

To pay your taxes if you hire an employee in your home, such as a caretaker, housekeeper or nanny, apply with the IRS, online if you wish, for an Employer Identification Number, a nine-digit number that the IRS uses to identify employers’ accounts. Attach Schedule H, Household Employment Taxes, to the 1040 form. Using Schedule H, you figure your total employment taxes, which you add to your income tax.

Penalty

Paying under the table wages can get you tax penalties and jail time.
Dejan Ristovski/iStock/Getty Images

The penalty for paying wages under the table can be worse than just paying back what you owe in employment taxes, plus penalties and interest. You could go to jail. The IRS publishes case after case of people prosecuted for employment tax fraud, the charge for paying under the table. Take Estaban Lane Stubbs of Colorado, for example. Stubbs was sentenced to 12 months in prison in September 2010 and was ordered to pay $336,753. Stubbs, doing business as Lobo Drywall, which he ran in Anchorage, Alaska, employed illegal aliens and paid them under the table, failing to withhold and pay taxes. Because his competitors paid their employees on the book, the competitors could not compete after paying employment taxes, workers' compensation and unemployment insurance. Stubbs easily underbid his competition but paid for it in the end.

Another Case

There are numerous incidences of people paying under the table wages and getting caught.
Levent Konuk/iStock/Getty Images

Another case, published by the IRS, that demonstrates the illegality of paying under the table wages was the case of Edward Albanese, a Newark, New Jersey, owner of DDB Interior Contracting Inc. and Regency Interior LLC. Albanese, in 2008, paid more than $164,000 in under the table wages to employees to avoid paying about $50,000 in employment taxes. He repeated the process the next quarter, paying out some $78,000 in under the table wages to avoid about $24,000 in employment taxes. Albanese admitted to paying $2.4 million in under the table wages from 2005 to 2008. He was sentenced to 24 months in jail and must pay the IRS $1.8 million.

Fair Tax Act

The Fair Tax Act was introduced to Congress in 2003.
Eric Hood/iStock/Getty Images

Partly to address the growing underground economy problem, a bill was introduced to Congress in 2003, H.R.25, called the Fair Tax Act of 2003. This bill aims to repeal the income tax, payroll taxes and estate taxes and replace those taxes with a 23 percent sales tax on goods and services. “The Fair Tax Book,” written by Neal Boortz, a syndicated talk show host, and U.S. Rep. John Linder, points out that the underground economy in 1970 was between 2.6 percent to 4.6 percent of the American gross domestic product. By 1994, that figure grew to 9.4 percent, around $650 billion, all untaxed money.