No, it’s not legal to pay employees under the table. As an employer, you need to pay federal, state and sometimes even local payroll taxes for each employee. Also, according to page 78 of the 1040 instructions, your employees must pay federal and likely state and sometimes local taxes on their income. Paying under the table avoids these regulations. The result? Employers and employees can be hit with federal and state penalties and fines—even jail time in some cases.

What is “paying under the table?”

Paying an employee “under the table” means that an employer is:

  • Not recording that payment officially as payroll; and
  • Most likely paying in cash so the money can’t be tracked as easily as paper paychecks and electronic direct deposit records; and
  • Typically not reporting these employees to the proper agencies, such as new hire reporting, quarterly wage reporting to unemployment agencies, etc.

If the definition above sounds like the employer’s trying to hide something, it’s because they are. There’s really only one reason for paying under the table: an employer or employee is trying to defraud someone. Whether the other party is the government, an organization, or an individual, in most countries including the U.S., fraud is illegal.

If it’s illegal, why do some people do it?

On the employer’s side, the number one temptation for paying an employee under the table is to commit payroll tax evasion. By not recording a payment, the company can avoid being taxed on it.

For employees, there are a number of reasons to ask an employer to pay off the record in cash including:

  • Reporting less income, thereby paying fewer taxes;
  • Dodging child support or alimony payments;
  • Avoiding the garnishment of wages to pay debts; and
  • Staying under the notice of the U.S. Citizenship and Immigration Services.

The opposite of “under the table” is “on the books” which means that an employee’s salary or contractor payments are recorded properly in a company’s ledger, taxes are withheld and paid, and payroll reports are filed.

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