In the business world, paying employees "under the table" may appear to be a quick and easy solution to cut costs or avoid regulatory obligations. However, the practice of paying workers "off the books" is strewn with serious legal ramifications that can have long-term consequences for both employers and employees.

Non-reporting violation

While the payments themselves (almost always made in cash) are not illegal, the normal practice of paying cash and not reporting the payments to various government entities violates several laws, including tax, labor and Social Security. In other words, the failure to accurately report the payments to the proper government (federal, state, and local) entities is the violation.

For example, if an employer pays an employee under the table, it does not report the payments to the IRS accurately and in the proper timeframe. Therefore, that employer would not be withholding federal income taxes, FICA taxes, or other mandatory taxes. While many well-meaning employers look at this practice as the main purpose of paying employees cash under the table, the employer is actually committing tax fraud, which is a serious criminal offense.

Employee impacts

Workers can also suffer from being paid under the table. If a worker is not legally recognized as a paid employee, they are often not covered by labor laws that otherwise protect them because their work is not properly recorded. Employees would be unable to obtain various benefits including unemployment benefits, worker’s compensation, and Social Security.

Penalties

If an employer or employee is suspected of or is found to be violating these laws, government agencies may audit, investigate and take legal action.

An employer and employee may face not only civil but also criminal penalties. Potential penalties for employers include, but are not limited to, fines, imprisonment, loss of business license, and/or back taxes, depending on the severity of the violations.

Employees who receive cash under the table are committing fraud and may be liable to back pay taxes with added interest, as well as other civil penalties like fines or criminal penalties like jail time.

An audit would almost assuredly find that the employer was not paying taxes on the income being paid out to the employee.

Failure to properly report income that your business makes will subject you and your business to significant overdue taxes and penalties, among other potential penalties previously discussed.

Paying employees under the table will likely be viewed as "negligent or intentional disregard of the law." According to the Minnesota Department of Revenue, the penalty for negligent or intentional disregard for the law is 10% of any additional tax assessed that is due to the disregard. On top of that, the 2024 interest rate is 8%, which is added to tax and penalties from the time the debt is past due until it is fully paid.

It's just not worth it

While paying employees under the table may appear to be a prudent way to save some money in the short-term, the long-term consequences far outweigh the perceived short-term benefits.

The risks that accompany off-the-book payments may lead to severe financial and legal consequences. Adhering to employment laws and regulations will not only ensure the safety of employees but also will fumigate the potential legal ramifications that accompany under-the-table payments.

Jared Nusbaum is an attorney with the law firm of Zlimen & McGuiness, PLLC in St. Paul, MN. His practice areas include employment law, small business law, litigation, and bankruptcy. Email him at jnusbaum@zmattorneys.com. Ellie Sammon, a law clerk at Zlimen & McGuiness, PLLC contributed to this column. Sammon is a 2L at the University of St. Thomas School of Law.