Employees and employers in some industries are accustomed to paying and receiving compensation “under the table,” or without complying with state and federal payroll tax requirements. But the legal risks of paying in cash are significant if and when the IRS or a state agency audits the employer. An employer may face personal liability for willful failure to withhold employee pay and payroll taxes.
Paying by cash, check, or other compensation to avoid payment of payroll taxes is illegal. That is, employers who pay under the table could be criminally prosecuted and/or may end up paying substantial penalties and interest charges for failing to report all wages. Payroll taxes include income tax and additional taxes. These additional taxes are what many describe as social safety net services, such as state disability insurance, worker’s compensation, and unemployment for workers who qualify following an injury or layoff.
Employers pay some taxes and employees pay others. In California, for example, employers pay unemployment insurance as well as “employment training tax,” which provides training funds to “empower workers.” Employees pay state disability insurance tax, which provides temporary payments to workers who are unable to perform their usual duties because of a temporary disability like a pregnancy or injury. This insurance also covers employees who take time off of work to care for an ill family member or to bond with a new baby or adopted child (known as Paid Family Leave). California Personal Income Tax is also withheld from an employees’ wages and credited toward the amount the employee would need to pay annual for state income tax.
The federal government also collects payroll taxes from employers, including an income tax. Social Security and Medicare (“FICA”) taxes must be withheld from an employee’s ages. An employer must also withhold federal unemployment taxes. The IRS assess’ penalties for failing to pay federal taxes. For instance, in most circumstances, if an employee is paid at least $2,000 per year, the employer must pay employee taxes. Every year, the IRS assesses billions in penalties to employers who failed to pay employment taxes and accurately report employee income. Following an audit, most employers agree that the penalties associated with paying employees under the table costs more than complying with the law in the first place.
For more information on California employment laws, contact experienced employment attorney Jonathan S. Dennis of the Dennis Law Group today.