"Off the books" is a term that is often used to describe payments that are tendered but are not recorded in the financial records of a business. In most nations, tax laws to allow for this type of payment in a very limited range of situations, with many of those allowable instances having to do with the short-term rendering of services that are under a certain amount and thus not subject to withholding. The term itself is sometimes associated with an attempt to pay cash for services that by law should be recorded in a company’s accounting records and subjected to tax withholding and reporting.
In terms of situations that do legally allow for payments that are off the books, specific tax laws provide some exceptions from withholding, often by classifying the payments as something other than wages. For example, casual employment that involves pay under a certain amount and for no more than a specific period of time may not be subject to withholding and can often legally be paid from a petty cash account rather than a payroll account. Tips that are under a certain amount each month are sometimes not required to be reported as income and are considered off the books.
From time to time, employers may offer potential employees the opportunity to work off the books, often by agreeing to pay the employee in cash. While on the front end this may seem appealing, agreeing to this type of payment arrangement can lead to a number of issues. Since the wages are not being reported as income and are not being taxed, those wages are not being credited into any national pension or social security system operated by a federal government. This will likely have an adverse affect on the amount of benefits that are received during the retirement years.
Being paid off the books also means that the employee does not enjoy any of the benefits offered to other employees who are being compensated on the books. Participating in a group insurance program is not possible. Vacation and personal days are not accrued, and receiving bereavement pay when a loved one passes away is highly unlikely. Should the employee be injured on the job, any workman’s compensation coverage that is available to other employees would not be extended.
Perhaps the greatest danger of being paid off the books comes when tax authorities become aware of the illegal activity. Even if the employer does not withhold taxes, the employee remains responsible for tracking and reporting all income to the proper tax agencies. Failure to do so can result in the application of fines and penalties to the back taxes owed, seizure of property to settle the tax debt, and possibly even a jail sentence. For this reason, agreeing to work off the books for an extended period of time is rarely a wise move, and could lead to a great deal of difficulty later on.
It is important to note that working off the books is not the same as working as an independent contractor. An independent contractor is not classed as an employee, but as a provider of specific services. Companies routinely report payments to independent contractors to tax agencies, and those contractors are responsible for calculating and paying taxes on any payments received under this type of arrangement.