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?
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 in to Social [entity display="Security" type="section" active="true" key="/security"]Security[/entity] 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 like 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.
And let’s make sure we understand a few things, ok?
- Unless you have a representation letter in hand, you and I don’t have an attorney-client relationship, capiche? I mean, I’m sure you’re a nice person. I appreciate you stopping by the blog. But it doesn’t mean anything more (I’m having a weird deja vu to a couple of bad dates in college).
- Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. This blog isn’t meant to offer you legal advice. I’m just calling it like it is. If you have real questions – i.e. you’re hiding in a closet while the feds bang on your door – you need to consult with a tax professional. If you live in my corner of the world, that might be me. But see #1.
- I do work at a law firm. Some might even say I’m a partner at said law firm. But this blog is in no way affiliated with my law firm. The other partner and my malpractice carrier insist on it. And I have to live with one of them. And it’s not my malpractice carrier. So, again see #1.
- I’m not responsible for anything anybody says on this blog except me. But play nice. I don’t want to have to throw you out of here (there’s that deja vu to college again).
- And one more thing. I’m not here to help you cheat the system. That should be obvious. But just in case it’s not, the IRS wants me to reiterate that I’m not. So consider this your Circular 230 Notice:
In order to comply with requirements imposed by the IRS, I must inform you that any U.S. federal tax advice contained in this blog is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter that is contained in this blog.
It will also fail to make you rich, lose weight, get white teeth or regrow hair that has been lost. I can’t guarantee dates or life matches (in fact, it’s arguable that if your friends find out that you read a tax blog, you could lose points – but I’m not telling!). I have never made a good stock tip (that I’m aware of) and I can’t buy your gold.
If after all of that, you still have a question, check out my “ask the taxgirl” policy here.
- Ask the taxgirl: “Temporary” Employees and 1099s
- Ask the taxgirl: Temps as Employees
- Ask the taxgirl: Getting Paid Under the Table
- Ask the Taxgirl: What to do with a 1099
- Ask the taxgirl: Self-employment Tax