When your boss pays you under the table, the law doesn’t recognize you as an employee, which means you lose out on a number of benefits and legal protections. Being paid off-the-books doesn’t get you in trouble provided you satisfy all of your tax responsibilities. Your “employer,” however, may be in trouble with various government agencies if they’re ever caught.
Employer Risks & Rewards
If your employer typically controls which tasks you perform each day and the way you complete them, you should be paid on the books as an employee. This doesn’t mean you can’t get paid in cash, it merely requires your employer to withhold income, Social Security and Medicare taxes from each payment. Your employer is also responsible for making matching contributions to Social Security and Medicare and paying federal unemployment taxes. By paying you under the table, your employer saves a substantial amount of money in these taxes and gets to avoid the bookkeeping burden that payment of these taxes would otherwise require. But given the penalties your employer faces for not withholding tax, paying employment taxes or filing a W-2 for you – the consequences can be quite expensive for them.
Income Tax Problems
Regardless of how you earn income, you have an obligation to report all money you earn and pay the appropriate tax on it. If you don’t, you may run into trouble with the Internal Revenue Service if it catches wind of your income. Some of the consequences you may have to deal with include a penalty for failing to make estimated tax payments during the year (as a result of your employer’s failure to withhold), accuracy-related penalties if you don’t report all of those under-the-table payments on your tax return, as well as interest charges on the entire amount of back tax and penalties you owe. And if you don’t file a return at all, you even face failure-to-file penalties.
Social Security Benefits
Although you may not feel it now, you’re actually putting your Social Security retirement benefits at risk when getting paid under the table. Since your employer isn’t paying into your Social Security and doesn’t withhold money from your wages for it either, it means you’re not getting credit for working. Ultimately, this can reduce the monthly check amount you receive during retirement. You can, however, avoid this result by filing a Schedule SE with your tax return and paying these self-employment taxes yourself.
Despite your ability to stay out of trouble, there are additional drawbacks to getting paid under the table. Since your employer incorrectly treats you as an independent contractor, you’re ineligible to receive worker's compensation if you’re ever injured on the job, you won’t be able to apply for unemployment benefits if your employment is terminated, and its unlikely that you’ll ever receive some of the typical benefits of employment, such as 401(k) matching, subsidized health insurance or paid vacations. In addition, you have no legal rights under federal and state employment laws, meaning you have no legal recourse if your employer illegally discriminates against you or refuses to pay you overtime for excess hours worked.
- Internal Revenue Service Publication 15
- Cornell University Law School: 26 USC Chapter 68, Subchapter A - Additions to the Tax and Additional Amounts
- Internal Revenue Service: Self-Employed Individuals Tax Center
- The Wall Street Journal: Cash & Career: The Perils of 'Off the Book' Jobs
- Missouri Department of Labor: Are You off the Books?
- Markhoff & Mittman, P.C: Workers' Compensation For Workers Paid Off The Books
Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.