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View Full Version : What happens to an employer who does everything off the books?


Washoe
05-08-2009, 12:12 AM
If an employer pays all of his employees cash under the table, doesn’t deduct anything for state or federal taxes or social security, and doesn’t obtain or keep any INS information on his employees, what happens if he gets caught? Little slap on the wrist and don’t do it again? A few hundred dollars in fines and a stern admonishment to straighten up and fly right? Or is he off to meet the tossed salad man? Will the IRS ream his ass AND keep him under a microscope for the rest of his life? Or can the employer just say something like “well, as far as I’m concerned they’re all independent contractors; it was up to them to report their income?” And who gets into more trouble—the employer, or the employees?

Snnipe 70E
05-08-2009, 12:32 AM
With our records the IRS will guess how much he has earned they will determine what he owes and then take from him what they think he should pay. Plus they will add penilities and interest. If he is a big operator and it is determined that he has evaded large amounts he could be charged with tax evasion. As far as his employees being independent contractors, that will not fly if he has not filed 1099 forms.

Also after they get done with the employeer they are going to go after his employees.

pulykamell
05-08-2009, 01:00 AM
Or can the employer just say something like “well, as far as I’m concerned they’re all independent contractors; it was up to them to report their income?”

While that is true, if you are the employer of an independent contractor and you pay them more $600 or more in a tax year, you are supposed to issue a 1099-MISC. More precise info here. (http://ehow.com/how_13664_know-issue-1099.html)

Washoe
05-08-2009, 01:17 AM
With our records the IRS will guess how much he has earned they will determine what he owes and then take from him what they think he should pay. Plus they will add penilities and interest.

Also after they get done with the employeer they are going to go after his employees.

So they make him pay all the taxes that he should have remitted plus some, and then they go after the employees for more? For example: Joe T. Plummer makes $20,000, and should have paid $3000 in taxes but didn’t. So they make Joe’s employer fork over three grand plus fines, penalties, etc., and then they make Joe cough up ANOTHER three grand?

DrDeth
05-08-2009, 01:23 AM
The IRS will make him pay back Employment taxes, back up to 10 years (it could be longer, but they usually only go back 10 years). Both halves. With interest and penalties.

The IRS may threaten Fraud etc, but generally unless he's made a big fuss about it, they usually are OK if he just agrees to all the taxes and penalties- which will be huge, and not dismissable in bankruptcy either (usually, ymmv, ianal). They will take every dime he has and most of his future dimes too. It will not be pleasant.

If the employees filed and paid as contractors on Sch C, they will be OK, in fact they may be entitled to a refund.

Of course if they didn't report the income, it will go harsh with them also.

Note that no one ever gets away with this for too long. Someone will rat him out; an ex-wife, a fired employee, an audited employee, etc.

Unless he has knowlingly hired illegals, that part won't be too bad.

The Second Stone
05-08-2009, 01:24 AM
Plus the employees will understand that they can steal as much as they want. Not only that, but they can turn the employer into the IRS for a bounty based on the percentage of what is collected.

IAmNotSpartacus
05-08-2009, 01:33 AM
I think OP needs to clarify whether or not this employer was paying taxes on the income he used to pay his employees but apparently didn't deduct. Sounds like this employer would have paid more taxes on the income since he wasn't deducting the expenses of the income.

Oh, as for the 1099s? He can claim he forgot to file it, and pay a $50 penalty.

Washoe
05-08-2009, 01:38 AM
I think OP needs to clarify whether or not this employer was paying taxes on the income he used to pay his employees but apparently didn't deduct. Sounds like this employer would have paid more taxes on the income since he wasn't deducting the expenses of the income.

Sorry, for some reason I’m being a bit dense tonight. I can’t figure out what you mean. Can you rephrase it?

Snnipe 70E
05-08-2009, 01:50 AM
So they make him pay all the taxes that he should have remitted plus some, and then they go after the employees for more? For example: Joe T. Plummer makes $20,000, and should have paid $3000 in taxes but didn’t. So they make Joe’s employer fork over three grand plus fines, penalties, etc., and then they make Joe cough up ANOTHER three grand?

Joe T. Plummer's boss made some money, he paid Joe $20,000 under the table. the boss did not pay the taxes on his profits nor the Socal Security taxes for his employees so they go after him for what they determine he owes. And they also go after Joe for the taxes he did not pay.

DrDeth
05-08-2009, 01:56 AM
So they make him pay all the taxes that he should have remitted plus some, and then they go after the employees for more? For example: Joe T. Plummer makes $20,000, and should have paid $3000 in taxes but didn’t. So they make Joe’s employer fork over three grand plus fines, penalties, etc., and then they make Joe cough up ANOTHER three grand?

Take a look at your W-2. Besides Income tax, there's also FICA, FUTA and etc. Your employer pays half of those (this is a rough figure, on some they pay all, on other you pay most, but in general, you pay 1/2 and they pay 1/2). These are called "Employment taxes".

So, yes, Joe may owe $3000 in Income taxes, but he also owes $2000 to Social Security, etc, and Joe's boss also owes $2000 or so.

DrDeth
05-08-2009, 02:01 AM
Sorry, for some reason I’m being a bit dense tonight. I can’t figure out what you mean. Can you rephrase it?

Bob the Boss earns (for example) $200,000 in his plumbing business. Out of that he pays Joe, Mary, and Sam $20,000 each (total $60000 in payroll). Now, Bob will also have say $40000 of "supplies". Is Bob paying Income tax on his fake "net" of $160000? or his real net of $100000? In other words, is he writing off his payroll somehow without filing Payroll tax returns?

Washoe
05-08-2009, 02:11 AM
Is Bob paying Income tax on his fake "net" of $160000? or his real net of $100000?

Oh now I get it! (Thanks.) No wonder the little twerp pays everybody directly out of the cash register! He’s not declaring cash sales, and conceals the fact by diverting the money to his employees.

ETA: It's a dry cleaner, BTW. There was a thread here recently wherein somebody suggested that all dry cleaners did this to some extent. I'll go look for it and and see what kind of consensus everybody came to on the subject.

IAmNotSpartacus
05-08-2009, 02:20 AM
Oh now I get it! (Thanks.) No wonder the little twerp pays everybody directly out of the cash register! He’s not declaring cash sales, and conceals the fact by diverting the money to his employees.

This can only go on for so long before his inventory will show some major discrepancies against his revenues. There's no way an employer is going to be able to 'pay all his employees cash' from 'cash transactions out of the cash register.' Way too much inventory flying off the shelf without being sold.

Washoe
05-08-2009, 03:19 AM
Ah, but it’s not a mercantile business! That’s the beauty of it. He only has three employees. He pays two of them about $700 each per week, out of the till. He pays me about $300 - $600 per month for odd jobs (cleaning out the swamp cooler, etc.), usually out of the till, but sometimes via company check. So not only is he underreporting his own income (he nets about $300,000/year), he’s not matching social security contributions, etc.

Lynn Bodoni
05-08-2009, 03:31 AM
Or can the employer just say something like “well, as far as I’m concerned they’re all independent contractors; it was up to them to report their income?” And who gets into more trouble—the employer, or the employees? There are certain standards and guidelines that govern whether a person is an employee or independent contractor. The employer doesn't get to pick and choose, he has to follow the guidelines. And the employer will probably get in more trouble.

IANAtax lawyer/CPA/whatever.

Washoe
05-08-2009, 03:40 AM
Unless he has knowlingly hired illegals, that part won't be too bad.

Uh...I think he has.

friedo
05-08-2009, 03:54 AM
This can only go on for so long before his inventory will show some major discrepancies against his revenues. There's no way an employer is going to be able to 'pay all his employees cash' from 'cash transactions out of the cash register.' Way too much inventory flying off the shelf without being sold.

For service-oriented businesses like dry-cleaners, it can be easy to do this for a long time without getting caught.

The proprietor of a local video arcade where I grew up used to pay his teenage employees with giant bags of quarters. It was a brilliant move: in addition to not having to record the income, most of the employees blew half their sack on games after their shift ended.

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