What Does Paid Under the Table Mean?

“Paid under the table” refers to an informal payment arrangement for work where no official records are kept for tax or employment purposes. This practice involves cash payments not reported to tax authorities, such as the IRS, and excludes standard payroll deductions or benefits. While cash payments are legal, failing to report them is not.

Defining Paid Under the Table

“Paid under the table,” also known as “off the books” or “unreported employment,” describes a scenario where an employer compensates an individual without documenting the transaction for tax collection or employment regulation. This means the employer does not withhold federal income tax, Social Security (FICA), or Medicare taxes from the worker’s pay. The employer also avoids paying their share of these payroll taxes, as well as federal unemployment tax (FUTA) and state unemployment tax (SUTA). Payments are often made in cash to avoid a paper trail, and no official tax forms like a Form W-2 or Form 1099-NEC are issued to the worker. This arrangement is a violation of the Internal Revenue Code and constitutes tax evasion.

This practice bypasses standard financial and legal obligations for both parties. The employer intentionally avoids tax liabilities and other employment-related costs, while the worker receives gross pay without immediate deductions. The absence of formal employment records means there is no official documentation of wages earned, hours worked, or taxes paid on behalf of the individual. Such arrangements are considered part of the “underground economy” or “shadow economy.”

Implications for Workers

Receiving payments “under the table” carries several drawbacks for workers. A primary concern is the lack of official income records. Without documented earnings, it becomes difficult to qualify for loans, such as mortgages or car loans, as lenders cannot verify a stable income source. Similarly, applying for rental housing can be challenging without verifiable employment.

Workers also miss out on employment benefits and protections typically associated with legitimate employment. These include:
Employer-sponsored health insurance, paid time off, and retirement plan contributions.
Contributions to Social Security and Medicare, which can reduce or eliminate eligibility for future benefits like Social Security retirement benefits, disability benefits, and Medicare.
Workers’ compensation insurance if injured on the job, leaving them responsible for medical costs and lost wages.
Unemployment benefits, as no unemployment taxes are paid on their behalf.

Even though taxes are not withheld, the worker is still legally obligated to report and pay taxes on all earned income to the IRS. Failure to do so constitutes tax evasion, which can lead to penalties, interest on unpaid taxes, and potentially criminal charges. If the Social Security Administration discovers unreported income, particularly for those receiving benefits like Social Security Disability Insurance, it can lead to repayment demands for overpaid benefits, fines, and even fraud investigations.

Implications for Employers

Employers who engage in “under the table” payment practices face severe legal and financial repercussions. They are evading federal and state payroll taxes, including Social Security, Medicare, federal unemployment tax (FUTA), and state unemployment tax (SUTA). For instance, employers are required to match employee contributions to FICA taxes, which is 7.65% of wages, in addition to withholding the employee’s portion. Failing to deposit and report these taxes is a serious violation.

Beyond tax evasion, employers often neglect to provide workers’ compensation insurance, leaving them exposed to liability if an employee is injured on the job. They also risk violating minimum wage laws, overtime pay regulations, and other labor laws. If discovered by tax authorities, employers can face fines, penalties, and back taxes with accrued interest. Penalties for willful failure to withhold and deposit employment taxes can result in criminal charges, including imprisonment for up to five years and fines up to $100,000. The IRS can also assess a Trust Fund Recovery Penalty (TFRP) against responsible individuals within the business for unpaid payroll taxes, which can be 100% of the unpaid amount.

Distinguishing from Legitimate Employment

Legitimate employment adheres to established tax laws and labor regulations, providing transparency and legal protections for both employers and workers. For employees, this involves the employer withholding federal income tax, Social Security, and Medicare taxes from each paycheck. These withheld amounts, along with the employer’s matching contributions, are then remitted to the appropriate federal and state tax agencies.

At the end of the year, employers issue a Form W-2, Wage and Tax Statement, to each employee, detailing their total wages and all taxes withheld. This form serves as official proof of income and tax payments. For independent contractors, legitimate arrangements involve the issuance of a Form 1099-NEC (Nonemployee Compensation) if payments for services exceed $600 in a year. Independent contractors are then responsible for paying their own self-employment taxes, which cover Social Security and Medicare contributions.

Proper employment also includes maintaining comprehensive payroll records, such as employee names, addresses, Social Security numbers, dates and amounts of payments, and copies of Form W-4 for tax withholding. These records ensure compliance with federal and state reporting requirements and enable workers to access benefits like unemployment insurance and Social Security credits. The transparent reporting of income and the fulfillment of tax obligations differentiates legitimate employment from “under the table” arrangements.