Why do some businesses (illegally) prefer to pay their employees cash under the table?

I’m not talking about the morality of it, but simply the financial. I also understand why an employee would like a little hidden cash from the IRS, but the employer misses the tax break.

For example, if I pay someone $20/hr, even adding on social security, unemployment and workers compensation taxes, I can still count the full amount against my personal or corporate income (25 to 39% savings). If I pay cash, then I obviously cannot.

So what are some reasons an employer might choose to break the law and cost himself money?

People often agree to work for less if it’s “tax free,”.

You are assuming that they report all their revenue for which they would take deductions on employee wages. Likely they are not reporting the revenue.

So their share of social security (7.65%), unemployment insurance (1%?), worker’s comp (1.5%?) disability (1%?) adds up. Plus, if you have employees you are required to remit these withholding on a timely schedule. Those payments could affect cash flow.

Though, if an employer is willing to pay in cash, I wonder what increased penalties there would be if they actually withheld employee social security, and all the other statutory deductions like state and federal income taxes, and then didn’t remit them to the collecting agencies. Best (worst) of both worlds!

The tax break for paying those employer taxes is not as much as the amount saved by not paying those taxes.

If the employees are illegal immigrants there are legal sanctions against hiring them–although considering the huge number of illegal immigrants I doubt if these laws are strongly enforced.

In many (most?) cases, the whole point of hiring illegal immigrants is so the employer can pay less than minimum wage. Since this is illegal, the payments pretty much need to be cash under the table.

Years and years ago I worked at a place that paid us (for purposes of this example) $7/hour cash, but reported as if they were paying us minimum wage (which was around $4 at that time). Their reasoning was that they could keep a happier staff, so less turnover, but still pay some payroll tax to reduce the likelihood that anyone official would take the time to wonder how they were open 18 hours a day, 7 days a week with no employees.

Which I realize does not directly address the OP, but it’s what I thought of.

Not any more. If raided, employers need “plausible deniability” so they need to show they got some sort of ID and treated everyone the same.

Now, if you’re a one horse operation, then who cares?

If the workforce is particularly transient, and the operation is very small scale, it’s a whole lot easier just to pay out cash under the table than to jump through all the paperwork hoops every time one of your lawn mowing guys leaves and you hire a new one.

No nefarious screwing of illegal aliens, and no deliberate tax shirking, just a desire to not have to do a bunch of paperwork every time you hire or fire someone, which in a lot of seasonal type businesses is pretty often.

And this illegality reaches to the highest level: does anyone remember the name of the Secretary of Treasury (?) candidate who failed to pay taxes for her nanny?

Zoe Baird (nominated by Bill Clinton).

I know of a company that paid delivery guys cash every night because due to high turnover it would have been a hassle (I guess) to constantly do paperwork for replacements. Cash nightly also made the delivery guys happy and made it easy to find a sub if somebody called in sick. Then the company got large enough that audits were a real possibility so they made the switch to on the books delivery guys who received paychecks.

ETA: Apparently Clinton also nominated a woman named Kimba Wood to be a federal judge and she had also failed to pay taxes for her nanny. Didn’t Timothy Geithner also have some sort of tax issue, although not as serious (but still pretty serious considering his job)?

Oops, sorry, missed the edit window a second time. Kimba Wood was a federal judge who was nominated for the position of Attorney General after Zoe Baird’s nomination was withdrawn. Zoe Baird was also an Attorney General nominee. Misread the wiki article!

In Thailand, a lot of English teachers get paid cash under the table to avoid the complex paperwork for hiring a foreign worker. And the expense, because a work permit for a foreigner commands a hefty annual fee from the government. Particularly the dodgier schools won’t even have “teachers” who stay a full year.

Couldn’t you theoreticallly hire them as an “independent contractor”, handing them all the paperwork they need to set up with the IRS? Then you’d just hand them the money and never ask if they bothered to fill out said paperwork…

The problem is that “independent contractor” has a specific legal definition. You can’t just claim someone is an independent contractor unless they really fit the definition. FedEx has lost a number of lawsuit from truckers challenging this exact issue.

You also need to pay for workman’s comp insurance for legal employees.

Businesses that are employing people under the table often have sources of income they aren’t reporting. Joe builder takes a job that pays cash, he pays his guys cash and his only reported income is what he deposits into his own account.

That used to work, but now there are quite a few rules as to what does and does not constitute an “independent contractor”.

I recently sued (successfully) a former employer who preferred to pay under the table. Her pattern was to pay for awhile, then stop paying and if anyone complained entirely deny having ever hired the person in the first place. She seemed to have this odd notion that by doing so there would be no proof she had ever employed any of those people.

I personally know of two people who, despite being paid wholly in cash, have proved her wrong on that count.

The reason I sued her was that she stopped paying me as well, as related at some length here. But in my case, I had insisted on actual paychecks. Apparently, though, she never passed on the withholding to the relevant revenue agencies. Said agencies have apparently noticed her at this point. Sucks to be her.

In other words, she was a con, a thief, and will shortly, I think, be officially a criminal.