My employer pays me under the table, does he benefit from this in tax breaks?

Question

Small business, owner pays me under the table 8/hr. He says it's like being paid 10/hr. But I believe he may be benefiting from this in some way through tax breaks. Could he be?

Answer 1

Nope, he doesn't get a tax break, but he is expensing what he's paying you somehow in his business. Now, by paying you under the table, he's not paying any payroll taxes on this, probably not paying any worker's comp insurance either (so don't get hurt on the job), and probably not offering you any health insurance either. If he's caught and your caught playing this game you will both be in trouble. And you better hope that he doesn't end up giving you a 1099 at the end of the year, if he does then you're screwed big time. You'd be responsible for self-employment (SE) tax in addition to the regular income tax. SE tax is 15.3% of 92.35% of net self-employment income.

Answer 2

Let's see. 2 years from now, your new boss gets audited and the IRS tells him he can't deduct your pay unless he issue you either a W-2 or a 1099-Misc, so he does. Then the IRS audits you because the income wasn't on your tax return. You now owe 30% of that money in tax, penalty and interest. The the IRS shares the tax return with your state who then audits you for fraud for collecting unemployment benefits when you in fact had income. You now owe the state. Both the IRS and the state will try to take collection action. You get another job and your wages are garnished; you file a future tax return and the refunds are always applied to the debt....but the debt keeps on growing.... Short answer, report the income to unemployment. When you file in 2009, report ALL of your income.

Answer 3

You don't even sound like you benefit from being paid under the table. I've shown most of my clients who are being paid under the table that they are missing out on a lot of tax credits by being paid under the table and would actually get a refund without paying anything in.

It would actually be hard though for your employer to get tax breaks by paying you under the table, because it sounds like he isn't paying taxes either.

Answer 4

You're both breaking the law. When the IRS finds out, and they have an extremely annoying habit of sniffing out this type of tax evasion, you'll both be hit with fairly massive levies.

But to answer your question, he's getting several benefits from this, at your expense. He's not paying your Social Security or Medicare taxes but you have to pay them when you file. He's also not providing Worker's Comp insurance for you or any other typical employment benefits. If you get injured on the job, he'll just say that you were an independent contractor and should have known better to provide your own insurance coverage.

If you aren't paying your SS and Medicare taxes, you're not accumulating credits in the SS system. If you should become disabled, you'll get nothing from Social Security. If you should make it all the way to retirement age that way, you'd get no retirement benefits or Medicare coverage either.

To come out even with the typical benefits of an employee you need to be paid MORE as an IC. Typically about 50% more. So by his logic, for $10 per hour of benefit to you he should be paying you $15 per hour. Since he's paying you only $8, he's getting off for about half price. At YOUR expense. Nice guy, huh?

Answer 5

He doesn't have to pay his half of your social security and medicare, or other employer taxes like workman's comp, so yes he is benefitting. But he can't deduct what he pays you either, so that might even out.

What you are doing is illegal for you if you are not reporting all of your income and paying taxes on it. If and when you get caught, you'll owe back taxes, plus penalties and interest, on the amount you took under the table.

Depending on your job and how much you are paid in a year, it's also illegal for your employer, so he will likely be in trouble with the IRS right along with you.

Answer 6

The last two answers have good advice. I will bet he gives you a 1099 so that he can deduct payments to you and at the same time give you no benefits.

Expect that 1099, perhaps with a "bonus" of an inflated amount. He will get an even bigger deduction, you will get a bigger tax bill.

Answer 7

Well he probably is benefiting from paying you under the table. Actually both of you are benefiting from this your getting paid without any money going to taxes. Which is always cool.

Answer 8

duh. You could have trouble at tax time yourself, careful. ;-)