In 2007, a Massachusetts lawyer hired a woman for office support. Unfortunately, the new hire’s husband had health problems, so she requested the lawyer pay her under the table in order to maintain their MassHealth eligibility.
Paying someone “under the table” generally means paying in cash, without reporting the employment to any government agency. In the employer’s mind, it means avoiding red tape and saving tax money; in the employee’s mind, it often means maintaining government benefits, avoiding wage garnishments, or avoiding immigration issues. However, in the government’s mind, it’s patently illegal, and there are penalties to prove it.
Back to the story: the lawyer, feeling for the employee, paid her $400 weekly, under the table. Seven weeks later, the employee lost the job and listed the position on her application for unemployment insurance. That’s when the axe fell: the government investigated the matter, informed the lawyer that he needed to pay employment tax and late penalties, and initiated a lawsuit for tax evasion. The employee received her unemployment compensation; the lawyer received a $2,000 civil fine from the attorney general, and he was barred from practicing for three months.
The lesson is that even when an employer doesn’t necessarily benefit from the arrangement, it’s never a good idea to pay an employee under the table. Some employers might shake this off and say, “I won’t tell, and he won’t tell, so no one will know.” But this often is not the case. Employees might file for unemployment insurance and tip the government off that way. They might also tip the government off by filing for social security benefits, discovering a lower-than-expected payment, and consequently submitting documentation of your arrangement.
Or your employee could get hurt on the job, resulting in a workers’ compensation claim that you don’t have insurance for. You’re still liable for that injury, and you’ll have to pay for it. On the other hand, if you do have workers’ comp for the employee, your coverage is likely a factor of your payroll, which you’ve likely already lied about to the IRS, resulting in yet another lie to the workers’ compensation insurance company, also known as insurance fraud.
And speaking of the IRS, the federal government isn’t content to rest on its laurels and take the taxes and late penalties that it’s entitled to after discovering your evasion. They can, and often will, pursue penalties of up to $100,000 for individuals or $500,000 for corporations for each offense.
And don’t forget about the possible penalties for child support fraud, failure to otherwise garnish wages, failure to file new hire paper work properly, and conspiring with an employee to avoid these various liabilities, not to mention the negative publicity all of these proceedings could bring for your business.
The bottom line: if you’re paying under the table, you will be held responsible for the bulk of the penalties and tax liability. If you’re concerned about your company’s tax, insurance, or wage garnishment liability, do not hesitate to contact an employment attorney.
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