Paying workers ‘under the table’ or with cash can save businesses a bundle in taxes, but the potential consequences are grave. Not only is this practice illegal and could result in severe financial penalties but it also shortchanges employees.
The novel coronavirus (COVID-19) pandemic has made this abundantly clear. As many laid-off workers who were paid under the table have learned, they do not qualify for unemployment benefits if their state has no record of their employer contributing to the insurance requirements. They may have trouble getting other financial assistance as well. You should protect your business and its workers by following the rules.
In general, compensation is subject to federal income and employment taxes, as well as taxes that may be assessed on state and local levels. Employees are personally responsible for federal income tax on their wages, and both employees and employers are responsible for paying employment taxes.
The main employment tax, mandated by the Federal Insurance Contributions Act (FICA), comprises three elements:
- A 6.2 percent Old-Age, Survivors, and Disability Insurance (commonly referred to as Social Security tax)
- A 1.45 percent Hospital Insurance tax on all wages (known as the Medicare tax)
- An additional 0.9 percent Medicare surtax on wages exceeding $200,000 for single filers and $250,000 for joint filers
Employers also must pay unemployment tax under the Federal Unemployment Tax Act. That tax is six percent on the first $7,000 of wages, but it may be effectively reduced to as little as 0.6 percent due to credits for state unemployment programs.
Employers’ responsibilities usually extend beyond taxes. You may be required to pay overtime and provide benefits to employees — ranging from qualified retirement plans to family medical leave time — all governed by federal laws. Employees without such benefits who become sick with COVID-19 do not qualify for paid leave. They may be forced to work anyway to support their families and, thus, spread the infection further.
To support employees in the event they are laid off, employers often must pay for different types of employee insurance, including Workers’ Compensation, unemployment insurance, and, depending on the state, disability insurance. In addition, the Affordable Care Act imposes minimum health insurance coverage requirements on employers with 50 or more full-time employees (and full-time equivalent employees).
Note: These warnings do not apply to workers who are legitimate independent contractors. Contractors, who work for themselves, are responsible for paying their own taxes and providing their own benefits. But you must properly handle these workers by meeting certain tests to have them classified as independent contractors.
Consider the Real Cost
Paying taxes and providing benefits to employees are necessary costs of doing business. While they take a chunk out of your bottom line, not paying them can cost you, your workers, and, ultimately, the general economy, even more. Contact us for help managing expenses and reducing taxes legally.