Taxpayer asks:
I was wrongfully fired off of assumptions. It’s a small family owned business. They used to pay me under the table. What are the steps/where do I turn to, to have them caught red handed for paying under the table?
taxgirl says:
This is one of those questions that is difficult to answer in a few paragraphs but I’m going to give it a go. For the sake of simplicity, I’m going to restrict my answer to the tax-related implications and not address any of the employment-related or other legal questions – that’s a whole other can of worms for which you may want to seek legal counsel.
First, it’s important to understand what “under the table” means. The implication is that you were being paid out of pocket and not documented. That may be true. It may also be true that your employer was classifying you as an independent contractor. Simply not having taxes withheld (even if you think they should have been) does not mean that you are being paid “under the table.” If you were, in fact, properly classified as an independent contractor – and not an employee – the employer would not have been required to withhold taxes.
Nonetheless, the employer should have clearly indicated to you the terms of your employment, including how you would be classified and paid. You should have also been asked to complete a federal form W-4 (for an employee) or a federal form W-9 (for an independent contractor).
If you believe that you have been misclassified as an independent contractor, you can report it to the IRS using a form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (downloads as a pdf). The IRS will review the facts and circumstances and contact the employer for his or her side before officially determining your status. If it turns out that the IRS agrees with you, it doesn’t exempt you from your own personal tax obligations.
If you didn’t complete any forms and it was clear that your employer really was paying you “under the table” or what we call “off the books” (meaning no record of your existence for tax or employment purposes), that’s different. In most cases, there’s no real incentive to completely pay workers off the books unless there’s something else going on, such as the employee not having the authority to work in this country or an attempt to avoid credit obligations such as student loans or alimony. But still, it happens.
Your employer never should have offered to pay you off the books and I’m not giving him or her a pass. But the problem in this context, from a tax perspective, is that by accepting an agreement to be paid off the books, you’ve caused yourself some agita in the process. You’re definitely not paying into Social Security or Medicare which affects your ability to collect in the future. You likely haven’t been reporting on your side to the IRS or the state (that’s the point of getting paid off the books, right?) so depending on how long this has been going on, you have some catch-up to do that will likely be expensive.
There may also be a difference in terms of how much money you actually received versus what your employer claims to have paid you. Again, if it’s off the books, the issue of proof is a big one. Make sure that you have excellent records.
So what should you do? That’s a personal choice. There are options if you were mistreated or misclassified. But if this really is just sour grapes because you accepted a deal that didn’t work out as you hoped, you don’t get a break for turning someone else in. My advice in many of these cases is to settle up on taxes on your end and move on. Yes, you can report your employer but I’m not really sure what that gets you, other than a bit of Schadenfreude.
Bottom line: don’t accept an offer to pay you off the books. Your employer isn’t doing you any favors and these arrangements almost always end in disaster. If and when this finally catches up with your employer, he or she won’t hesitate to throw you under the bus in much the same way you’re contemplating now.
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
One must give a lot of thought to deciding if revenge is so sweet that it warrants being like the guy who sticks his pistol in the waistband of his Levis & decides to practice “fast draws.” Sometimes, the consequences are not so good, particularly if you are a little fast on the trigger.
If this was truly an “under the table” deal (cash payments) you’re likely to be in the position of going to the IRS and saying to the effect, “Joe here paid me cash and it was part of his scheme to under-report his income because he didn’t report all of his revenue either. Oh! And by the way, I didn’t report the income,either.” You may take Joe down; but, this may be like, “ready, fire, aim” for you . Revenge is not so sweet that it’s worth taking yourself down too.