Employees Can Face Consequences When They Are Paid Under The Table
- Unemployment or State Disability Insurance benefits may be delayed or denied.
- They may fall foul of the IRS for not reporting their state and federal income tax.
- Employees will not have to check their stubs, file a W-2 Form or verify their earnings
California Taxpayers Have a Greater Burden When Employees Are Paid Under the Table
Taxpayers will have to contribute more to support essential public services like:
- Unemployment Insurance
- Law Enforcement
What Is Under The Table?
Paying an employee under the table means paying them in non-traceable forms of payment such as cash to avoid reporting payroll taxes.
What Are Some Excuses For Paying Employees Under the Table?
- Cannot afford payroll tax and insurance
- It is common practice in the industry
- The business is more competitive because of the reduced expenses
- Employees do not request their tax withheld
- It makes bookkeeping easier
Why You Shouldn’t Pay Employees Under the Table
It is an illegal practice which can result in criminal prosecution and significant penalties and interest.
Paying Under the Table Does Not Avoid Payroll Taxes
You do not save payroll taxes in the long run. When you are audited, the IRS or EDD auditor will have minimal information to work with. This means that if you are audited, you can end up paying higher payroll taxes, plus penalties and interest. Generally, you will end up paying 20 times more than if you just handled your payroll correctly. All government agencies will be aware of the illegal activity, and it may hamper your ability to receive loans, grants, and participate in government schemes.
The below table shows an example of this to illustrate the costs of avoiding payroll costs.
Employer A reports a yearly payroll of $100,000, with five employees being paid $20,000 each. This employer pays state payroll covering UI and ETT up to the wage limit of $7,000 per employee.
Employer B also pays $100,000 yearly. However, because they pay cash under the table, there are no records of how much was paid to each employee, meaning there is no record of how many employees work in the company.
The below table shows the additional costs Employer B has due to paying employees under the table.
|Employer A||Employer B|
|1 State Disability Insurance* (SDI) (1.0%)||1,000.00|
|2 Personal Income Tax (PIT) (6%)||6,000.00|
|3 Penalty (142.3% – see footnote)||14,941.50|
|4 Non-Registered Penalty||500.00|
|5 Failure to Issue Withholding Statement Penalty||250.00|
|6 Failure to File Electronic Return Penalty||50.00|
|Interest (@5%) through June 30, 2020||525.00|
|7 Total due for 1 year||$1,225.00||$26,766.50|
The penalties listed in this example do not represent all possible penalties that may be charged.
- SDI — Normally withheld from the worker.
- PIT may be abated. Refer to Information Sheet: Personal Income Tax Adjustment Process (DE 231W) (PDF) (edd.ca.gov/pdf_pub_ctr/de231w).
- Sections 1112.5 (15%), 1126 (15%), 1128(a) (50%), 1128(b) (50%), and 13052.5 (12.3%) of the California Unemployment Insurance Code (CUIC) (leginfo.legislature.ca.gov/faces/codes). The penalties
- Section 1126.1 of the CUIC ($100 per employee).
- Section 13052 of the CUIC ($50 per estimated employee).
- Section 1112.1 of the CUIC ($50 for failure to file return) effective January 1, 2019.
- Calculations are based on year 2020 tax rates. Tax rates, interest, and penalties are subject to change each year.
- Includes Paid Family Leave (PFL).
Note: The UI and ETT are paid by you, the employer. The SDI and PIT are paid by your employees. However, if you fail to withhold employee-paid taxes, they become your responsibility.
Brad Nakase, Attorney
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