Will you get caught? What are the consequences? How much does it cost to go legit? What you need to know about under the table employees and payroll taxes.
If you have under the table employees, what are the chances you’ll get caught?
I’ll be blunt… It is very likely that you will get caught. Times have changed The cash-only employee model is dead in today’s modern electronic age. There are many common scenarios and situations in where federal or state enforcement will catch wind of these actions.
Perhaps the most common scenario is when an employee goes his own way and applies for unemployment. I see this happen all of the time. The Hawaii State’s (or your home state’s) Unemployment Department will see right away that you do not have an account and have not been paying unemployment tax. This goes right to enforcement, and then they will let the feds know as well.
Another very humbug situation would be if one of your “cash” employees gets hurt while at work. You are required in most cases to be insured for worker’s compensation. A simple accident will not only expose you but it can bring down your entire hard-earned business along your lively hood along with it.
Some cash-only employers also get caught when an employee claims the money he or she made from you on their taxes to increase available “earned income credit” or other credits. The new due-diligence documentation will have the situation documented with the IRS – which is required when there is no W2 provided.
There are many other ways that state or federal enforcement will find out. They can be extremely resourceful when it comes to the movement of money these days.
What happens if you get caught with “under the table” employees?
If the IRS suspects that you have been involved in this kind of criminal activity, they will likely assign a revenue officer to investigate. He or she will have tough questions for both you and the employee, and since it is very illegal to lie to him or her, it will be an extremely uncomfortable conversation.
Sorry again for my direct tone but, if convicted, there is a reasonable chance you will be incarcerated. The IRS will also apply liens (take your things and money from your bank accounts) to get the back-taxes, and there will be a lot of back taxes.
During the past three years, the IRS has prosecuted 177 individuals for payroll tax evasion. Nearly 80% of these convictions resulted in the serving of 17 months in prison and other such institutions, on average, as well as having to pay back the taxes owed along with penalties and interest.
The problem is that owing these “payroll taxes” is not the same as being late on your personal or business “income taxes”. Social Security and Medicare taxes that have not been deposited is a serious situation that comes with stiff penalties and may be considered criminal. This is because it’s the EMPLOYEES money (not your money) that was supposed to be withheld and deposited with the Department of the Treasury on their behalf. The IRS looks at this as if you took the employees money and ran.
As you can tell, for many reasons, I really do not want you to pay your employees off of the books. It’s because I’ve seen what happens when employers do this and find themselves under investigation and then come to me for help.
How Much Will it Cost to Go Legit and Run Payroll?
To start from this point forward, payroll taxes will add about 10% to what you pay your employees. You will also have to get insurance – which is actually pretty cheap and easy to get (almost like car insurance). Lastly, you will have the cost of hiring a payroll service (or do it all yourself, which is complicated).
One advantage of going legit, however, is that you can now legitimately write off your employee expenses against your income, which will be significant. For many small employers, going legit becomes more favorable than paying their employees cash – not to mention begin able to sleep at night.
Running payroll for past years and catching up will prove to be much more difficult. You will have to track down all of the previous employees and issue W2s. Then they will have to amend their tax returns. What a mess. This is why you should stop paying cash now and go legit. The less, the better.
Can You Run Payroll by Yourself?
Running payroll on your own is complex and we do not recommend it. There are many various government account numbers you need to get and several tax returns that must be filed at different time intervals. The money that you withhold from your employees paychecks, along with your share of the payroll taxes have to be deposited to the Department of the Treasury at various times as well. There are severe penalties for not filing and depositing on time. It’s a very involved process.
This is why payroll services exist. A good full-service payroll company will help you will ALL of your payroll needs and keep you filing all forms, depositing, and paying your employees on time.
If you think you might want to hire us to help get your employees on the books, please contact us here. . Everything will stay private. Our email is firstname.lastname@example.org and our phone number is 808-744-5314. Aloha.
- How to Hire Employees in Hawaii – Small Business Employer’s Guide
- Should You Get Your Under the Table Employees On The Books?
- Small Business Payroll – How to Pay Yourself
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