An employer at a job interview told me today that my paycheck would be tax-free. As in actually $12.00/hr as opposed to $12.00/hr pre-tax; I would receive the entire $12.00/hr with no taxes withheld.
She said this had something to do with the company being a private company, but I don’t know specifics. She did not say that the payment will be cash, but did say that it is a “nicer way of saying we basically pay you under the table.” This is technically a small business, though I think they have around 30 or so employees.
Is this legal, and is there any point to doing so? Won’t I just have to pay the appropriate taxes on my tax return in April anyways? If I choose not to report this as income, will I have to pay anything? If I DO report it as income, will I have to pay?
I will only be working there for three months.
Been searching online but can’t find any info on this.
So long as they don’t report your pay as 1099 income to the IRS, you can probably get away with it. But it is illegal, as far as the IRS is concerned. You are supposed to report all income, even if your employer doesn’t.
It sounds like the company may be trying to classify you as an independent contractor as opposed to an employee. A full analysis of the difference between those categories is beyond the scope of some dude on a message board, but suffice to say that if you’re only doing work for one company, they can tell you when to be at work and control how you go about doing the work, you’re probably not an independent contractor. However, if they say you are, then they don’t have to handle withholding of your income taxes, pay for unemployment insurance for you, or the key issue, pay half of your payroll taxes.
This is wages so of course you’re required to report it to the IRS and pay taxes on it. If the employer gives you a 1099 and states that you’re an independent contractor then the IRS will expect you to pay self-employment tax (the full amount of the payroll tax as opposed to the 1/2 that employees pay) as well as any income tax. Even if you don’t get a 1099 then you’re required to report income that you received.
If the employer told him in so many words that she was paying him under the table, then it’s unlikely she’s going to be reporting anything to the IRS.
If, as Ambrosio said, they send you a 1099 next February, then they reported your work to the IRS, it was legal (if disingenious, as Ambrosio described), and there was a point to doing so (c.f. Ambrosio again).
On the other hand, if they’re paying you under the table and not reporting anything to the government, then it’s not legal, and there are also reasons, albeit different ones, for doing it.
Yes, you have to report all income on your tax form and pay taxes on it.
If you do not report it and do not get caught, you will not have to pay anything. If you do not report it and do get caught, you will have to pay more than you would have had to pay otherwise (i.e., interest and fines).
Yes.
Taking the woman at her word, the bottom line is this: Instead of paying you (12 + *x*) per hour and sending the x to the government in the form of withholding, they’re just going to pay you 12 per hour. This saves them x and a bunch of paperwork. They’re assuming you’ll play along. Whether you do or not is up to you. (Of course, if you get injured on the job, you’re SOL, as you never really worked there. winkwink)
From the employer’s point of view, it’s cheaper to classify someone as a contractor than an employee. As an employee, that same 12 dollars is subject to the employer’s portion of Social Security (6.85% or thereabouts), state unemployment taxes, and federal unemployment taxes. In addition, you might be eligible for benefits such as health insurance and vacation (neither of which are legally mandatory).
If you’re a contractor, you get that 12 bucks, and YOU have to pay the employer’s part of social security as well as your own; in addition you don’t have unemployment protection.
Personally, unless the choice is taking the job or moving to a refrigerator box, I wouldn’t touch this job.
Here is the problem with these under-the-table arrangements. Everything goes along just fine for a while, maybe for years. The employer saves on taxes, the employee doesn’t report the income and saves on taxes. Everybody thinks they’ve gotten away with it. Then a few years down the line, maybe after you’ve quit the job and moved on, the IRS comes to examine the employer’s books. The employer starts frantically sending out 1099 forms to under-the-table employees for amounts paid over the last x years. The employee suddenly is faced with paying several years’ worth of back taxes, interest, and penalties. And there are all sorts of penalties: failure to file, failure to pay, understatement of income, accuracy, fraud. You add these all up and the interest and penalties add up to more than you earned.
The statute of limitations is six years if you understate your income by more than 25%. No statute of limitations applies if you don’t file a return or you willfully commit fraud.
I have one friend who’s been fighting in court for about a year because she claims her employer called her in on a job where she got injured, and the employer claims she’s an independent contractor who he isn’t responsible for.
An outsider might think this is a simple case (either she was or wasn’t working for this company.) But it’s turned out to be a battle of lawyers, each agreeing to mostly the same facts, but saying they mean different things. In the meantime, she’s had surgery twice, and is probably permanently disabled.
Of course, that’s a nightmare scenario. In your case it’s more likely that next April your tax preparer will simply tell you, “your income is much higher than your withholding, and you have to pay X,” and X will include an extra 6.85% for the Social Security self-employment tax.
It is also not unheard of for a business owner to fully intend to pay someone in cash under the table, only to have their CPA at the end of the year point out to them that 1) this is against the law and they won’t sign off on their tax return and 2) you get deductions for reporting these payments since they are a business expense, so it’s really in their best interest anyway. Cue the surprise 1099 to the under-the-table worker who thought it was a paperless deal. Now of course that person can then contest the classification and claim that they should have been a W-2 employee, but frankly a lot of people in this position don’t know their rights in this regard and it’s a pain even if you do. My brother once had this happen to him (despite my warning), and I’m not sure how or whether that ever got resolved.
Bottom line: if you DO take the job, keep track of everything they pay you, and declare it on your taxes in the spring. Pay the 13.3 percent out of that, and your income tax; at 12/hour for 40 hours a week, that’s only about 2,000 a month so it’s not a huge sum, but at least you’ll be square with the IRS.
I’d make sure the employer knows you intend to do so. I had not noticed the short-term nature of the job, so that’s an argument for it MAYBE being legal to treat you as a contractor… but they’re still clearly trying to pull one over.
Their being a private company has fuck-all to do with it being legal to do it this way. I wouldn’t be surprised if they were cutting corners in other ways. Proceed with caution.
Check with a tax accountant about when you should be making payments. You can’t just wait until next April and pay whatever you owe. I believe you’re supposed to be making payments on a quarterly basis through the year and then in April you file your return and pay in the balance (which I believe can’t be more than ten percent of the total) or collect any overpayment.
1)> if you are Canadian or American born, Australian, or any other “commonwealth country” except Indian(sorry boss), you have rights as a sovereign and need to seek your remedy in law.
In truth, you have no income, “income”, legally, is “profits derived from corporate activity” and you are not a corporation. Again, see the above statement. Lawfully (different than legally) the fruits of your labors are your private property.
Unless you have entered contract via a government “tax form” through the employer when you were hired, technically, you are not making “income”. The T-1 in Canada and the corresponding form in the U.S. (help anyone with the name of the document) are in fact a contract whereupon you “gift” to the de facto “government” a portion of your “income”. Essentially, as under those forms you are contracting as a corporation (see straw man, stramineus homo and first statement above) you are liable to pay tax. Usually when you only deposit your cheque and not “cash it” you are not required to sign the cheque, at least in Canada. It is not money, nor an instrument which gives you money. There is no lawful money. If you are not required to sign the instrument upon deposit only, do that and use your bank card only. If you are required to sign it at all or need to “cash it”, sign your name then write in block letters below “UCC1-308”. Google that, to learn the meaning.
Likely, the employer wants to avoid paying anything such as matching E.I. or C.P.P deductions (Canada) and is probably doing business a little shadily at any rate. Take the money and run.
Since the OP is about legal advice and a real-life situation, it should have been in IMHO rather than General Questions. Moving it to In My Humble Opinion.
Right. Ignore uber069 there; he doesn’t know anything about how taxes actually work - as opposed to how all the “sovereign” people think taxes work and if you say the Right Magic Words then you get off scott-free - and check out this Tax Protester FAQ to check out all the oddball ways people think you can “legally” not pay taxes.
I think the OP should follow all of Uber069’s advice to the letter.
Then he won’t need to worry about income or paying the rent for quite a while, since as far as I know prison inmates aren’t required to pay for their own keep.
I know this is tongue-in-cheek, but inmates generally work to earn their keep. They do laundry or cook or produce license plates for pennies an hour. The pay is basically the equivalent of monopoly money, since all they can spend it on is purchasing shit at the prison commissary. They don’t get minimum wage, so their work is subsidizing their prison stay. We still have to pay tax money for prisons, but it costs less than if they didn’t work on the cheap.
Oh, and OP? If I were you, I’d ask the hiring manager whether they’ve successfully paid people in a similar fashion in the past. If they have employees who’ve been working under the table for years, then it’s probably a much safer proposition… but if they’re just embarking down that path with you, the risk is way too high. Also be aware that unsourced money coming into your bank account is going to make you look fishy if you’re applying for, say, a mortgage loan in the next, say, 5 years. You’ll look like a drug dealer or thief because, on paper, you have no income. If you don’t have income on paper, you can’t use it to qualify for a home loan.
Another way things like this go sour is that the employee wants to retire, and they find out that their social security payment is nothing because they haven’t worked forever (according to the SSA at least). They then say “but I’ve been working for Bob for years!” and the whole thing unravels.
Really though, for a short-term job like this, there is very little chance of you getting caught. So, it’s really all about how you want to live your life–do you want to do things the right way or do you want to have to constantly worry about the wrong sort of person knocking on your door and making things difficult? Another way to think about it–working under the table is kinda like having sex without a condom.
