The Pitfalls Of Paying Under The Table


Two people shaking hands above the table and exchanging money below the table.
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Keeping payroll off the books poses risks for employers and employees.

When business owners pay workers under the table they often don’t realize the pitfalls. Here’s a quick look at why it’s better to keep payroll on the books.

The risks of paying under the table for employers

In the eyes of the law, there are two primary reasons business owners pay under the table. To avoid paying payroll taxes and to hire undocumented workers. Both are illegal.

An employer may pay employees in cash as long as they keep records, withhold taxes and other deductions and report wages to the IRS in a timely way. However, it’s much easier and safer to pay with a check or direct deposit.

Employers who don’t withhold payroll taxes—which include Social Security and Medicare taxes—violate federal law. Also, employers are required to complete Form I-9 to verify the employment eligibility of each person they hire. Failure to do either can result in fines, an IRS audit and possibly jail time.

How paying under the table hurts employees

Individuals getting paid in cash still need to report the income. If their employer pays under the table, there’s no withholding and workers can be hit with a large tax bill when they file their taxes.

Another disadvantage for employees is that wages paid under the table are not reported for Social Security purposes. When these workers reach retirement age they’ll receive lower benefits than if all their wages had been reported.

Other employee benefits like workers compensation, unemployment and health insurance also won’t be available for those paid under the table.

Additionally, workers without documented income will find it difficult, if not impossible, to get a loan or qualify for government services.

What about hiring independent contractors?

Making cash payments without payroll withholdings to an independent contractor is legal. However, the worker must truly be independent. The IRS looks at these three factors to determine a worker is classified.

  • Behavioral: Does the company control what the worker does and how the job gets done?
  • Financial: Are the business aspects of the worker’s job controlled by the payer? The IRS considers how the worker is paid, whether expenses are reimbursed and who provides tools and supplies.
  • Type of relationship: Is there a written contract or employee-type benefits such as a pension plan, insurance or vacation pay? Will the relationship continue and is the work performed a key aspect of the business?
A simplified way to do payroll

If you’re new to payroll or find your existing system difficult, check out payroll services through Consumers. Our partners at BASIC can help you set up direct deposit and ensure correct withholding and IRS reporting for your team of employees.


All loans subject to approval. Rates, terms, and conditions are subject to change and may vary based on credit worthiness, qualifications, and collateral conditions. Federally insured by NCUA

Consumers business loans

Do you have business banking questions? Contact our knowledgeable commercial loan officers.

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