The short answer: no, it's not legal to pay employees under the table. Doing so evades payroll taxes and puts employers out of compliance with federal and state requirements like workers' compensation. When it's discovered, employers and employees can face serious penalties, fines, and even jail time.
The good news: staying compliant doesn't have to mean doing it all yourself. A payroll provider like Gusto handles the tax filings, withholdings, and reporting automatically, so you're covered.
Already paying employees under the table and want to go on the books? Skip to How to Fix It.
What does it mean to pay employees under the table?
Paying an employee under the table or off the books typically means an employer is:
Not officially recording the payment as payroll
Not reporting the employee to the required agencies (new hire reporting, quarterly wage reporting to unemployment agencies, and so on)
Likely paying in cash, which is harder to track than paychecks or direct deposit
In most cases, paying under the table is a way to avoid taxes or other legal obligations for the employer, the employee, or both. That's what makes it illegal: whether the money is being hidden from the government, a court, or another party owed a claim on it, not reporting income to evade an obligation is fraud in the eyes of the law.
However, not every situation starts with an intent to defraud. A common and accidental path is worker misclassification.
Misclassifying employees can lead to unintentionally paying under the table
Worker misclassification occurs when an employer pays someone as a 1099 contractor, with no withholding or reporting, when that worker actually meets the legal definition of an employee.
Misclassification often looks exactly like paying under the table—no taxes withheld, no payroll records filed—even though the employer didn't intend to break the law. And it usually is exposed through a workers' comp claim, an unemployment filing, or an Internal Revenue Service (IRS) Form SS-8 determination that retroactively reclassifies the worker as an employee. This leaves the employer liable for back taxes and penalties.
Why paying employees under the table is illegal
Paying employees under the table breaks the law in two ways: it's tax fraud, and it's a violation of employment law requirements like unemployment insurance and workers' comp.
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Tax evasion
Back door payments enable tax fraud for employers and employees. Both parties are sidestepping legal obligations to pay, whether or not either one thinks of it that way. Employers avoid paying payroll tax (including unemployment taxes and FICA taxes like Social Security and Medicare). They also avoid withholding and remitting the employee's income tax and payroll tax share from wages that should be reported. On the employee side, employees may avoid reporting the income on their own tax return.
Noncompliance with employment law
It's also a way of illegally sidestepping employment and labor laws. Because unemployment insurance contributions and workers' compensation premiums are calculated from reported wages, paying under the table means those payments never get recorded as wages in the first place, so no contribution is ever generated on them.
Risks for employers who pay employees under the table
If an employer is caught paying employees under the table, they may face serious civil and criminal penalties.
Back taxes, interest, and penalties. The IRS and the employer's state agencies will calculate what the employer should have paid in payroll taxes, including unemployment insurance, going back as far as they can document. Interest accrues daily from the original due date, and the IRS adds additional separate penalties for failing to file, pay, and deposit. (See the IRS's Employer's Tax Guide for full rules.) A state's insurance or labor agency assesses back premiums or fines for any period an employer did not carry workers’ compensation coverage.
Criminal exposure. Deliberately paying under the table can be prosecuted as tax evasion or failure to collect and pay payroll taxes, which both break federal law. Conviction can mean substantial fines and, in serious or repeated cases, jail time.
Personal liability. Forming an LLC or corporation protects an employer’s personal assets from most business debts, but it doesn't shield the employer here. Under the IRS's Trust Fund Recovery Penalty, any "responsible person"—an owner, officer, or anyone with control over payroll decisions—who willfully fails to remit payroll taxes can be held personally liable. That liability follows the employer individually, not just the business, and bankruptcy won’t erase it.
If you’ve been paying employees under the table, the section below walks through exactly how to fix it. Taking action early can improve the outcome.
How to fix it if you’ve already been paying employees under the table
Whether it happened by accident (i.e. a misclassified contractor who was actually an employee) or you made the decision knowingly, remedying the problem follows the same steps. The sooner you act, the better your options could be.
Stop the practice now. Before anything else, move affected workers onto proper payroll going forward. Every additional pay period off the books adds to what you'll eventually owe.
Talk to a tax professional or employment attorney. A professional can help you figure out how far back your liability goes, whether you qualify for any relief programs, and how to handle the disclosure in a way that limits penalties.
Voluntarily disclose to the IRS and your state agencies. Coming forward on your own, rather than getting caught through an employee's unemployment benefits claim or workers' compensation benefits filing, generally results in more favorable treatment. However, you’ll likely need to file back payroll tax returns, pay what's owed in back taxes and unemployment and workers' compensation contributions, plus interest. Consider the IRS Voluntary Classification Settlement Program (VCSP) if the issue was contractor misclassification.
Adopt a payroll system. Once those pressing issues are being resolved, put a real payroll system in place with proper wage recording, tax withholding, and required reporting so it doesn't happen again.
A payroll system is what Gusto helps you create. Every payroll run automatically records wages, calculates and files the right taxes, and keeps the reports you'd need if you were ever audited.
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FAQs
Is paying employees in cash legal?
Yes, paying employees in cash is legal. When cash payments become a problem is when an employer uses it to avoid recording, withholding, and reporting. Pay in cash while following the same tax, payroll, and recordkeeping rules you'd follow otherwise, and you’re on solid ground.
My employee asked me to pay them under the table. Should I do it?
No. Even if an employee requests off-the-books pay, complying is still illegal. The legal responsibility for payroll withholding and reporting falls on the employer, regardless of who initiated it. Agreeing exposes you to back taxes, penalties, and potential criminal charges. The employee's request doesn't change your liability.
What happens if I get caught paying employees under the table?
Getting caught typically means owing back payroll taxes and unemployment insurance (plus interest and IRS penalties), and back premiums or fines from your state's insurance agency if you went without workers' comp coverage — calculated as far back as records allow. In serious cases, it can lead to criminal charges for tax evasion or fraud, and responsible persons who willfully failed to remit payroll taxes can be held personally liable even if the company is an LLC or corporation.
How does the IRS find out about employees being paid under the table?
The IRS typically discovers under-the-table pay through an employee filing for unemployment or workers' compensation with no wage record on file, a Form SS-8 worker-status determination, a disgruntled employee tip, or a routine audit that flags cash income mismatches. Agencies also share data with each other, so a red flag from one agency can trigger a review by another.
Is it okay to pay a contractor under the table?
No. Legitimate independent contractors still need to be reported to the IRS (typically via Form 1099-NEC) once their payments cross the annual reporting threshold,. And if the contractor is actually functioning as an employee, paying them off the books is worker misclassification, carrying the same risks as paying an employee under the table.
