Legal Obligations of Employees
If you are being compensated under the table, request that your employer begin paying you on the books as soon as possible. If your employer refuses to comply, or if you have been mistreated by an employer paying you under the table, contact attorney Brad Nakase today. Employees paid in cash or without proper records are legally required to declare that income on their federal and state tax returns.
Failing to declare income from under-the-table work constitutes tax evasion, which is a federal offense. The IRS imposes substantial penalties for failing to report revenue, including fines, interest on unpaid taxes, and in extreme cases, criminal charges that can lead to incarceration.
Legal Obligations of Employers
While some employers pay employees in cash, paying employees under the table in California is illegal. Employers who compensate workers under the table frequently fail to keep accurate documentation, which can result in the employer owing the employee’s share of tax liability if an auditor cannot determine what worker was paid how much. Paying employees under the table is a severe violation of the Internal Revenue Code (IRC). Employers are obligated to deposit and withhold a variety of employment taxes, regardless of whether employees are compensated in cash or by other methods, such as direct deposit. Penalties for employers caught compensating workers under the table can include back taxes, interest, and severe fines. If the government concludes there was intent to avoid paying taxes, criminal prosecution may follow.
Common Misconceptions About Under-the-Table Work
Some workers may like being compensated under the table to avoid paying taxes. Another frequent reason is the employee is undocumented and not legally authorized to work. However, the obligation of reporting income lies with the taxpayer, and ignorance of the law is not a valid excuse. While cash payments are harder to trace, the IRS uses increasingly advanced software to identify financial discrepancies and irregularities, making under-the-table revenue detectable.
Potential Consequences for Paying Under the Table
For employees, failing to report revenue from under-the-table work can lead to:
- Loss of Benefits Eligibility: Employees paid under the table risk losing their eligibility for Social Security Disability and workers’ compensation benefits.
- Civil Penalties: The IRS may impose penalties for underreporting revenue or failing to file a tax return.
- Interest on Unpaid Taxes: Interest accrues on any unpaid tax liability, increasing the total amount owed.
- Criminal Charges: Intentional tax evasion can result in prosecution.
For employers, consequences include:
- Back Taxes and Penalties: Employers may be required to pay back taxes, penalties, and interest.
- Criminal Charges: Employers caught evading employment taxes may face criminal prosecution and imprisonment.
- Legal Action: Employees can sue for unpaid wages, overtime, and benefits.
Steps to Address Unreported Income
If you have earned income under the table and failed to report it, the IRS allows taxpayers to correct the situation by filing amended tax returns or reporting the income through voluntary disclosure programs. Keeping detailed records of all cash payments is critical. Employers must rectify under-the-table payments by reporting previously unreported wages, paying owed taxes and penalties, and establishing compliant payroll practices moving forward.
Ethical and Social Considerations
Beyond the legal risks, paying or accepting payment under the table undermines the tax system and social safety nets. Taxes fund essential public services such as unemployment insurance, schools, law enforcement, and infrastructure. Evading these taxes shifts the financial burden to other taxpayers and weakens public trust.
Conclusion
In summary, failing to pay taxes on income earned under the table is illegal and carries significant legal and financial consequences for both employees and employers. Compliance with tax laws is essential not only to avoid penalties but also to support the broader public good. If you find yourself involved in under-the-table work, consult a qualified tax professional or attorney to resolve the issue and ensure compliance with the law.
