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The phrase "paying someone under the table" refers to unreported compensation for work. This is a common type of illegal payment from an employer to an employee. Generally, both parties agree to hide the financial transaction in hopes of evading civil, criminal, tax, or immigration laws. Cash is the most common payment method in these situations, since it's hard to trace.
When Compensation Is Illegal
When a business hires an employee or independent contractor, it typically must collect identifying information about him or her and submit it to a tax department. That information is then used to collect taxes from the business and employee, which help pay for government services, like road maintenance and educational funding. The exact terms and collection procedures vary from country to country.
Issues arise when a business does not provide information about an employee who is receiving financial compensation. When this happens, the employee has the opportunity to not report his or her income and thus not pay any taxes on it, and the business can also avoid paying payroll taxes. By doing this, both parties are committing tax evasion. Most countries consider tax evasion to be illegal and punishable by a fine, prison time, or a combination of both.
One of the most common motives for paying someone under the table is tax evasion. The more employees a company or business has, the more payroll tax it has to pay. A simple, yet illegal, remedy is to pay someone in secret without involving the government. Other businesses sometimes hire illegal aliens or unauthorized workers so they can pay them very low wages. This is illegal in many countries, however, so business often pay these people under the table to avoid possible fines and sanctions.
Another motive is engaging in criminal activities. Criminal syndicates tend to avoid keeping records that may implicate them in a crime, including traceable payment transactions for things like narcotics, stolen items, or product knockoffs. Instead, they choose to pay people secretly using untraceable means.
Pros and Cons of Cash
The payment method of choice for illegal transactions is usually cash. It is generally not as easy to trace as credit cards or checks, which leave a paper trail. This is not a foolproof method though, especially for those who regularly deposit their secret earnings in a bank. Most financial institutions flag customers who make unusually large deposits of cash or multiple smaller deposits consecutively, and may be required to report information to the government about them. If a person has discrepancies between his or her tax paperwork and bank statements, he or she may be audited.
Paying someone under the table is not always illegal. This is especially the case when employing people for odd jobs or babysitting. In many regions, a child under a certain age may not have to report revenue earned from things like babysitting or lawn mowing. Generally, anyone can legally be paid under the table if their wages are under the minimum reporting amount set by the government.
Freelancing vs. Illegal Payment
Receiving payment under the table is very different from working as a freelancer or an independent contractor. In this situation, businesses report all wages paid to freelancers to the government, if the payments are over a specific amount. Even though freelancers don't have their taxes taken out of each paycheck like other waged workers do, they still have to file and pay their taxes at the end of the tax year.