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Ask the taxgirl: Payments Made Under the Table

January 28, 2009 · 10 comments

Taxpayer asks:

I was working as an independent contractor in this small company. At that time, I was getting paid with no taxes being withheld. I assumed I was getting paid under the table, but 6 months after I stopped working there I received a phone call from them asking for my SSN. I did not give them my SSN.

Also, during the time I was working for them I was collecting unemployment insurance and since no taxes were being withheld I was declaring I was not working so I could keep collecting EDD money.

Do I have any rights to withhold my SSN after 6 months not working for them. I’m afraid if I do give them my SSN and didnt declare this income I will get penalized for not declaring income to EDD.

Any advice for me?

Taxgirl says:

It’s important to remember that your employer is not your friend. An employer who suggests that you might be paid “under the table” is definitely not your friend, for about a million reasons.

No matter how many times an employer thinks it might be cheaper to pay you under the table, it’s not. An employer’s share of taxes attributable to an employer is ultimately much smaller than the share of taxes attributable to an employee. Additionally, wages paid to employees and independent contractor are also deductible as a business expense. So, from a financial perspective, it makes more sense for an employer to report wages paid – even if they implied to you that they wouldn’t – not to mention that it’s, you know, illegal. There are all kinds of nasty things that can happen to an employer if they don’t report you properly and then you get laid off, injured, or become spiteful.

That said, just because you weren’t having taxes withheld does not mean that they were paying you 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. It may have been their intention all along to claim you and they just weren’t terribly organized… 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).

It sounds like that didn’t happen. But now, it sounds as if they’re trying to do things on the up and up, and they want to issue you a form 1099 reporting your compensation. Your refusal to turn over your Social Security number won’t prevent them from reporting your compensation to the IRS. Most likely, they will write “REFUSED” in the space where your Social Security number should go and send it to the IRS.

You will be subject to a fine for not providing your Social Security number for purposes of the form 1099. The biggest issue here isn’t so much the fine but the fact that you’re going to open your tax return up for scrutiny. The IRS will receive a form 1099 with your name on it. If you don’t report the compensation associated with that form 1099, your tax return will likely be flagged for review. If you haven’t reported your compensation, you will be responsible for the taxes associated with the income as well as penalties and interest.

As for your unemployment compensation issue, that gets tricky. Unemployment compensation is paid out of funds which are pooled from federal unemployment and state unemployment taxes and insurance. Cheating, by claiming unemployment compensation when you are working, actually drives up the costs of business for your former employer (trust me, I run a business) since the employer’s rates are affected by your claim. Additionally, since unemployment benefits are being strained right now, many states, like New York and Utah, are aggressively pursuing fraud claims. If you are caught accepting unemployment compensation while you are actually working, you could be prosecuted. Most states will require that you repay the overage plus a substantial fine. You could be required to perform community service, be placed on probation and in some cases, you could be jailed. You could be also disqualified from further benefits for a period of time.

On the tax side, I always advise compliance. In your case, you are required by law to produce your Social Security number to your former employer and properly report the income on your taxes. I would suggest that you immediately contact an lawyer that focuses on unemployment compensation and get some good legal advice about your repayment and reporting options on the UC side. You don’t want to make a bad situation worse. Good luck!

Like any good lawyer, I need to add a disclaimer: Unfortunately, it is impossible to give comprehensive tax advice over the internet, no matter how well researched or written. Before relying on any information given on this site, contact a tax professional to discuss your particular situation.

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{ 10 comments… read them below or add one }

1 Vinny January 28, 2009 at 10:25 am

I think you mean a W-9 and not SS-4 if this person were being treated as an independent contractor.

The situation sound to me like a small company was treating this person as a contractor but, like many small companies, had no idea how to treat independent contractors for tax purposes and probably found out at some point, “oh, poo, we’ve got to send this person a 1099 and we don’t have his/her SSN!”

Your writer also sounds like he/she had no idea how to handle being treated as an independent contractor and just needs to suck it up and prepare to fork over the associated income taxes, self-employment taxes, and possible penalties for underpayment of estimated tax. Hopefully he/she has some expenses to claim against the SE income (assuming the classification as an independent contractor was proper).

2 Kelly January 28, 2009 at 10:29 am

Doh! You’re right – that’s what I get from trying to work from home on a snow day. I’ll edit the form in the post.

3 Robert D Flach January 28, 2009 at 11:34 am

Kelly-

It looks like the person asking the question not only wanted to screw the federal government by not reporting taxable income – but also wanted to screw his state unemployment fund by collecting unemployment illegally while actually working.

No sympathy whatsoever for this person.

TWTP

4 JEF January 28, 2009 at 1:10 pm

The taxpayer should not assume that he is actually an independent contract just because that is what was agreed upon with the employer. Contractual agreement is only one of the factors used to determine tax status. The other two factors are behavioral (ie. can you set your own hours) and financial (ie. did the company pay your benefits). http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

If the taxpayer is classified as an employee then it would save him the self employment taxes (but it might cost the taxpayer the ability to claim certain deductions for expenses).

Either party can file an SS-8 to have the IRS determine the taxpayers proper status if the parties cannot agree. The company will probably want to avoid having the IRS investigate their employment policies (especially since they didn’t work this out before paying out the money) so the taxpayer should have some leverage in a discussion with the company.

No matter the status of the taxpayer I definitely suggest he do three things:
1. Speak with a CPA/tax lawyer to determine which tax treatment is best for your individual circumstances.
2. File a truthful return and pay any taxes you owe.
3. Speak with a qualified lawyer about the unemployment issue because I know nothing about that.

Like Kelly, I am not intending my comment to be legal advice. Please do not rely on anything in my comment without conducting your own research and speaking with a licensed tax professional.

5 garagefather January 29, 2009 at 12:22 pm

I would suggest the Timothy Geithner defense. It was an honest mistake even though you knew it wasn’t when you did it. Secondly, Timothy Geithner supposedly cheated for several years on his taxes while you only cheated the system for 1 year. Our Secretary of the Treasury is 3 times the tax cheat as you are. You should feel pretty good about that.
The one thing he may not have done is cheat the unemployment system. That may be your downfall because the, “I didn’t know I couldn’t collect unemployment while still working” defense is even more unbelievable than the “I didn’t know I had to pay my social security taxes when I earned money” defense.
Just remember: “It’s not breaking the law until you get caught,” and if you get caught, claim victim status so they will go easy on you.

6 Bill January 29, 2009 at 6:02 pm

I”m with Robert and garagefather. Working while collecting unemployment is illegal and you could be in serious trouble. That’s why it’s UNemployment. Claim ignorance, pay up, pay back the unemployment bennies, tell them you didn’t know independent contracting counted as “employment”, and pray the state and federal government believe you. Just because you don’t get a W-2 doesn’t mean you don’t have to pay taxes. (Although lots of business owners apparently do seem to believe that, given the number of restaurant and club owners around here who go out of business for not paying taxes, like, ever.)

7 irslinda January 29, 2009 at 8:30 pm

Honesty is best. Irs may not catch up with the underreported income for a year or so. But they will add penalty and interest to boot

8 Julie January 31, 2009 at 10:28 am

It was my understanding that in some states an employer can pay cash without tax implications for a certain number of hours??? Of course, it is the empolyees responsibility to do the right thing an it is wrong to collect unemployment and work.

9 Violet March 10, 2013 at 1:56 pm

It appear that there are too many rules with the tax system for the average person to understand. I can’t see how we are putting the burden on persons at the lower end of the tax bracket to understand laws that are difficult for accountants. If accounting and tax laws were easy then there would not be any need for CPAs, and the IRS. Employers hire accountants and lawyers to run their businesses so the burden should be the employers to start with, in regard to giving employees the proper forms. If employees didn’t need guidance they’d be the boss.

Taxgirls advice sounds crazy to me. You make it sound like the employee’s attempting to do something illegal, yet you make excuses for the employer. The employer may be “terribly disorganized” to do payroll correctly? Then don’t own a business. Try using this excuse at work and see how long you stay employed. The employer can write that the employee “REFUSED” to give me their SSN? Then the employer could shred your W-4 and claim you never gave it. This sounds too shady for me. If the employee fails to complete the W-4 form then they aren’t hired!!!! Isn’t this proof the employer is choosing to pay the employee under-the-table?

It is the employers responsibility to issue W-2s or 1099 to “ALL” their employees. Additionally, they are given a deadline of Jan 30th to get these to their employees. If this isn’t happening the problem starts with the employer or the governmental system that allows this. Why would an employer not want to issues one of these? What is he/she hiding from the IRS? Correct this problem and all else will fall into place. The employee then files based on these forms or visits with an accountant to see if they’ve earned enough in the year to file.

Jeff, my understanding about contractors includes another factor. The contractor has to be able to perform the job independently without being supervised. If the employees work is being overlooked by a manager or employer then they cannot be considered a contractor.

Like Kelly & Jeff. I am not intending my comment to be legal advice. Please do not rely on anything in my comment without conducting your own research since I too am not clear at understanding these rules. This is my understanding from talking with licensed accountants. You too should talk with a CPA.

10 jack do westminster December 23, 2013 at 6:48 am

According to the IRS Westminster press release
on Friday, Brian Lee and Jack Do on of Tan Sanh Ginseng
Herb at 9659 Bolsa Ave will undergo a thorough tax investigation.
“We (IRS) will be performing a full investigation of cash practices and a month long audit for each and every credit card transaction made during the 2010-2013 tax periods…. We believe that we will find a numerous amount of transactions that took place without sales tax being charged….” said OC IRS auditor Gin Ho.
The establishment had been flagged by the State sales tax system when
compared to other business taking place at the same address block.

The California Superior Court will subpena all credit card
holders placing transactions at Tan Sanh Ginseng Herb to produce receipts of purchase or they will be
sued by the state for sales tax. “The City of Westminster has been trying to clean up our act as much as possible from hustlers like the alleged defendants. We have to pay for roads and schools and all sorts of staff to keep the city going. It’s a shame things like this happen due to the selfishness and greed of a few the public suffers.”.
Future civil suits are pending the investigation of Brian Lee and Jack Do to revoke their
business license and prevent the future opening of storefronts in the County of Orange.

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