There are several names for “working under the table”: working off the books, unreported income, the informal sector, and the more pernicious name that implies illicit activity, “the underground economy”, among others.
There could be several reasons why someone would take an under the table job, as commonly seen in construction, domestic work, and food services. The most common ones are that the worker cannot obtain an “on the grid” job where one receives a paycheck with taxes withheld and a W-2 form received after the year ends, or they are undocumented and therefore unauthorized to hold W-2 employment but still need money.
These conditions make this type of worker prone to exploitation, and employers take advantage of under the table work so that they can evade payroll taxes and having to buy workers’ compensation insurance among other mandated benefits.
While unreported employment arrangements are illegal, the power imbalance between the worker and employer can make it difficult for any recourse to be conducted. Here’s what you need to know about working off the books, and what businesses and workers alike must be aware of.
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What Does Working “Under the Table” Mean?
To work under the table means that payments are made in cash with no way to trace it to either the worker or the business.
The worker receives cash rather than a paycheck or anything else that would have a paper trail, and the business does not maintain records of payment or the existence of an employer-employee relationship, even if they detrimentally rely on the worker’s services to operate (like a restaurant needing kitchen staff).
Unreported employment is estimated to be a $2 trillion economy, and the IRS claims that the government loses $500 billion in tax revenue annually due to unpaid taxes from both the employer and employee. Working under the table creates havoc for businesses, workers, and the government because these cash payments cannot be traced or quantified easily, if at all.
Is it Against the Law to Work Under the Table?
While paying wages in cash is not illegal, a “working under the table” arrangement is.
Are Cash Jobs Illegal?
Cash is still legal tender and can be provided to an employee instead of a paycheck or direct deposit. However, the employer still must comply with federal and state tax and labor laws regarding payroll taxes, withholding income taxes, mandatory fund contributions such as state disability insurance, and having worker’s compensation insurance in place.
A receipt or pay stub should also accompany the cash payment, explaining how much was withheld from the employee’s wages and what each amount was for (e.g. FICA, state income taxes).
Since it’s cumbersome to calculate these amounts in cash, cash payments usually indicate tax and labor law violations. Most companies that properly withhold taxes for their employees will issue paychecks that come with paystubs, or send this information electronically along with direct deposits. Since people who work under the table also tend to be under-banked, this can put them in an even more vulnerable position.
What ultimately makes working off the books illegal is that the business is not reporting the payments, regardless of whether or not the worker is reporting them on their own tax return.
What Happens if You Get Caught Working Under the Table?
Because the employer ultimately holds more power than the employee and makes the payments, the employer is the one who faces consequences and penalties for getting caught working under the table. But sometimes, employees could be treated as accessory or party to tax fraud if they specifically ask their employer not to withhold any taxes from their paychecks.
Is working under the table a felony? In some states, such as California, you can face criminal prosecution if the state Department of Labor finds out. Willfully ignoring employment laws and the tax code constitutes fraud.
Making an honest mistake with respect to withholding or worker classification results in a civil penalty, but purposely paying workers under the table and refusing to comply with employment laws can result in IRS and state tax department audits, interest and fines on top of the unpaid taxes themselves, and even jail time.
So yes, making employees work under the table is a crime with a steep price tag attached.
Working Under the Table and Taxes
Can You File Taxes if You Get Paid Under the Table?
Workers who received cash payments can file a tax return even if they don’t have any documentation, but have kept their own records (even if they’re simple, like a spreadsheet or memo app). Assuming that your income meets the minimum income threshold to file a tax return (with special rules for self-employment), you must file a tax return or you could potentially face charges for tax evasion.
If you have more autonomy over how you work, chances are you’re self-employed. Schedule C which is the form for self-employed people and small business owners, many who are likely to include cash payments with their 1099s from clients and digital payment processors.
But if you only have cash payments to report, you still need to use this one at tax filing time if you earned more than $400 over the course of the past year. However, the process is different for workers who have under the table income and what is likely an employer-employee relationship instead.
You don’t file Schedule C, but Form 4137. While primarily meant for cash tips when you’d otherwise get a paystub with taxes taken out, like bar tending and manicurist jobs, you can use it to report any kind of cash income where you were supposed to have taxes withheld but did not.
Employer Exposure for Paying Unreported Wages (Cash)
Running a business is complex and tax laws are always changing. Not all tax under-reporting happens because of intentional fraud. Sometimes honest mistakes are made, like thinking a worker is an independent contractor instead of employee or vice versa.
When it comes to cash payments, the IRS and other regulatory agencies look at the context of the payments. Cash-intensive businesses like coffee shops, laundromats, and convenience stores, or self-employed entrepreneurs like barbers, have their own audit procedures because transactions with no paper trail are more prone to criminal activity like money laundering and tax cheating, or simple mistakes when calculating taxes owed.
How Does the IRS Find Out if You’re Paying Workers Under the Table?
There’s several ways that the IRS, and other agencies, can find out if employees are not being properly classified and paid with adherence to tax and employment laws. One of the most common ways is when the employee files their personal taxes and uses Form 4137, which directly alerts the IRS to go after the employer for unpaid payroll taxes and seek out any other tax-related violations. Employees angry with their employer may also tip off the IRS and labor department purposely.
However, some workers will not file their own taxes with way out of simply not knowing it was option, or fear of retaliation (e.g. loss of income). Anonymous tipsters, like family or friends of the off the books worker, may notify the IRS. But the worker may still try to file for unemployment if they lose their job, or mention your business in any other aspect of day-to-day life like renting an apartment just to find out there’s no employment records.
Lastly, the IRS keeps detailed data on all types of businesses based on industry, size, revenue, location, and other data points. If your annual tax filings are missing and/or don’t line up with common trends seen in the agency’s data, it could raise a red flag for a tax or Schedule C audit which will eventually reveal that you are paying workers under the table.
State-Level Consequences for Unreported Employment
There’s several ways that the IRS, and other agencies, can find out if employees are not being properly classified and paid with adherence to tax and employment laws. One of the most common ways is when the employee files their personal taxes and uses Form 4137, which directly alerts the IRS to go after the employer for unpaid payroll taxes and seek out any other tax-related violations. Employees angry with their employer may also tip off the IRS and labor department purposely.
However, some workers will not file their own taxes with way out of simply not knowing it was option, or fear of retaliation (e.g. loss of income). Anonymous tipsters, like family or friends of the off the books worker, may notify the IRS. But the worker may still try to file for unemployment if they lose their job, or mention your business in any other aspect of day-to-day life like renting an apartment just to find out there’s no employment records.
While the IRS can certainly unleash a thorough and devastating audit of a business, state tax and labor departments are actually the agencies to fear the most.
This is partly because they’re often overlooked, but also because the IRS has a due process for business and individual taxpayers alike. You have a right to appeal any of the agency’s findings, the right to representation, fair treatment by revenue officers, and if you have any unpaid taxes, the right to settle them for a lesser amount. States do not necessarily offer these programs and may institute harsher fines and punishments since they may not be subject to a code of conduct like Treasury employees are.
Additionally, it is the state in which the business operates that handles unemployment, mandatory funds, and has their own set of labor laws in addition to the standards set by the federal Department of Labor.
Working under the tables can be discovered by the IRS, or by state agencies. While movies may show IRS agents kicking down doors and showing up unannounced, this is illegal under the Internal Revenue Service Restructuring and Reform Act. But state revenue departments may be within their rights to do this, and like the IRS, they track data of businesses that operate and file taxes within the state. If they were not tipped off by an unemployment claim, a surprise income or sales tax audit could reveal the crime.
Payroll Tax Fraud and Trust Fund Recovery Penalty
Payroll tax fraud takes place when businesses take out taxes from workers’ paychecks, but willfully do not remit them to the IRS and/or other tax departments. It can also include intentional misclassification, employee embezzlement of thse funds, and since many unreported employment arrangements often entail not even acknowledging an employee-employer relationship exists, simply ignoring payroll tax regulations altogether.
The first practice is known as “pyramiding”. Withheld taxes are either kept for the business or its owners and never remitted at all, or are used as “borrowed money” to get past a cash flow slump then paid late. When pyramiding and similar types of payroll tax fraud are committed, the IRS assesses a Trust Fund Recovery penalty, which makes the owner liable for 100% of the unpaid taxes. These practices often lead to a substantial amount of back tax debt, which is where our tax resolution services can provide a way out.
Unlike back taxes that can be settled and business debts that can be discharged in bankruptcy, Trust Fund Recovery penalties cannot be discharged at all.
Criminal Charges
Because small, cash-intensive businesses can make it difficult to detect off the books activity, many business owners think they’ll never get caught. But when and if they do, employment tax fraud carries extremely high incarceration rates compared to other tax fraud charges.
Working under the tables makes up a large portion of those charges, and prison sentences range from 14-24 months in addition to fines and penalties levied at the federal and state levels.
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Collecting Benefits and Working Under the Table
If your job is under the table, you’re going to have a harder time accessing benefits and worker protections that “on the grid” employees have, like correctly withheld taxes and payroll contributions, paid sick leave, unemployment, and workers compensation claims and short-term disability payments if you are injured on the job.
In addition to these benefits afforded to you under law that are strictly related to employment, there are also government benefits for individuals and families that can become more difficult to access as a result of working under the table. Unemployment and Social Security Disability are two programs you may lose eligibility for thanks to your employer.
Working Under the Table While on Unemployment
For unemployment in particular, you are at the mercy of your state’s labor department since it is a matter left up to each state. In addition to employer and employee contributions being required in order to receive benefits, every state has their own rules regarding length and compensation requirements which you might not meet regardless of whether you were under the table or on the grid.
However, if you had an on the grid job and are receiving unemployment but working off the books while you look for another job that’s on the books? You need to report this income on your tax return and to the unemployment bureau, per their rules. Many even require you to report unpaid work, such as providing childcare or using this time to start your own business.
Collecting Disability and Working Under the Table
If you are receiving Social Security Disability, working under the table while receiving these benefits can have disastrous consequences. It can nullify your eligibility and make it virtually impossible to receive them again, if you have not been deemed able to work and thus disqualified altogether, in addition to fraud charges and six-figure fines. Since it requires an investigation by Social Security, you should honestly report all work income to them because you will only skip benefits for that month. Routinely refusing to report under the tables work can equate to permanent loss of benefits.
Working Under the Table and Collecting Food Stamps
Food stamps are another matter. Collecting food stamps and working under the table is an issue mostly left to individuals states, as some institute weekly work requirements to receive benefits. Federal standards only look at gross monthly income, net household income after eligible expenses, and total assets, although some states are more lenient with asset limits (such as not counting your home or car). Since the income limits are incredibly low, it can be incredibly tempting to underreport your off the books earnings to qualify for more benefits. However, this frequently carries misdemeanor charges.
Depending on where you live, working under the table will not always disqualify you from food assistance provided that you make a good faith effort to count all of your income in an average month. However, some states will only grant benefits with definitive proof of income, like a paystub.
Housing and Vehicles While Working Under the Table
If you work under the table, it can make day-to-day life significantly more difficult, especially when it comes to housing and transportation.
Can You Get an Apartment Working Under the Table?
Getting an apartment while working under the table is not impossible, but you would need to prove to the landlord that you have a reliable source of income. It can also severely limit your housing options if the landlord uses a verification service to determine that you have a legitimate source of regular income.
However, having tax returns timely filed and readily available for reference can serve as proof in addition to paystubs.
Can You Buy a House Working Under the Table?
It’s virtually impossible unless you can show at least two years of experience in the gig economy, which is the gold standard for lenders. But if you have good credit, enough cash for a down payment, and regularly filed tax returns that demonstrate the regularity of your income, it can be done whether your cash income is from self-employment or needing to file a claim for unpaid payroll taxes.
Can You Get a Car Loan Working Under the Table?
Getting a car loan can also prove difficult if you work under the table, but it’s not impossible. Like mortgage lenders, banks and car loan services want to see that you have the means to repay your loan so they will accept tax returns as proof of income. If you do not have your taxes filed yet but need a car immediately, a “buy here pay here” car lot with a significant down payment is an option if you can’t afford an all-cash purchase for a used car.
Hurt While Working Under the Table
Since being off the books means no paid sick leave or disability insurance, and no workers compensation, check if your state has an uninsured workers fund like New York does.
Most all states have programs like this, but if you file a claim with them because you were injured on the job, you may be eligible for restitution if you’ve been hurt on the job. You should also contact the Legal Aid Society and any other resources to help you file for disability payments and any other appropriate action against your employer.
Can You Sue Your Employer for Working Under the Table?
You certainly can under federal tax and labor laws, and in most cases, state laws. In addition to the payroll tax and mandated benefit implications, there can also be overtime violations, unsafe work conditions, and a host of other issues that your local labor department will want to investigate more swiftly than the federal one.
An employment lawyer licensed in your state can help you get restitution for your unpaid taxes and benefits, in addition to any other compensation due to you from the labor department’s findings and/or employer’s offer to settle.
How to Report Someone Working Under the Table
If you want to purposely report your employer for tax fraud instead of waiting and seeing after filing for unemployment or any other actions that would tip off the IRS or state labor department, you have a few options.
The first one is to directly contact your state labor department. Your state or local agency is first channel you should try going through because they’re likely to have local inspectors they can get on your case right away, and an employer who is willfully violating the law will not want to deal with both agencies at the same time.
Next, contact the federal Department of Labor’s Wage and Hour Division with the following information:
- Name and contact information
- Employer’s name, contact information, and type of business
- Your job description
- How you’ve been paid, how much, frequency of payment
- Description of potential violations and why you think it warrants an investigation
- You can also tip off the IRS by calling 1-800-829-1040.
Is Working Under the Table a Sin?
According to Matthew 22:21, Romans 13:1: “Let every person be in subjection to the governing authorities”, so no one is above employment and tax laws.
