Why You Should Not Be Paying People Under the Table
Let’s talk about something that might feel a little uncomfortable: paying people under the table.
I understand why it happens. You want to keep things simple, avoid a pile of paperwork, and just get someone paid for helping out. Maybe a teacher covers one of your yoga classes, or a massage therapist fills in for a weekend. Handing them cash can feel like the easiest option in the moment.
But here’s the truth — that “quick fix” can lead to major issues later on, especially when it comes to the IRS.
The IRS and Compliance Issues
When you pay someone under the table, it means you’re not reporting those wages or payments to the IRS. While it might not seem like a big deal at the time, the IRS considers this tax evasion.
If you’re ever audited — or if that person later applies for unemployment, a loan, or files their taxes — it can trigger questions that lead straight back to you. In that situation, the IRS (and your state) can assess:
Back taxes that should have been withheld and remitted
Penalties for late payments
Interest on unpaid amounts
Fines for worker misclassification
Those amounts can add up quickly, even for small businesses.
Understanding Contractors vs. Employees
Before you pay anyone, it’s important to determine whether they’re an independent contractor or an employee.
If they’re a contractor — such as a bookkeeper, social media manager, or a teacher who only covers classes occasionally — you need to:
Collect a completed Form W-9 before making any payments.
Issue Form 1099-NEC at year-end if you pay them $600 or more in a calendar year. ($2,000 starting in 2026)
If they’re an employee — someone whose schedule, pricing, and work you control — they must be paid through payroll. That means:
Withholding and remitting payroll taxes (Social Security, Medicare, etc.)
Paying your share of employer taxes
Filing required quarterly and annual payroll reports
This distinction matters. Misclassifying a worker can lead to IRS and state penalties, back taxes, and other compliance issues.
The Real Cost of “Keeping It Simple”
Paying cash might seem easier today, but it often costs more in the long run. Common consequences include:
IRS penalties for failure to file or misclassification
Denied business deductions (you can’t deduct unreported cash payments)
Increased audit risk and stress
Doing things “off the books” might save you a few minutes now, but it can create unnecessary financial and legal exposure later.
Do It Right From the Start
The good news is that compliance doesn’t have to be complicated. A few simple systems can protect you and keep everything running smoothly:
Collect a Form W-9 for anyone you pay who isn’t on payroll.
Use a payroll platform such as Gusto or QuickBooks Payroll for employees.
Keep digital copies of all payments and related documentation.
Work with a CPA who understands your industry and can help you stay compliant.
When you handle payments correctly from the start, you’re not just avoiding penalties — you’re building a business that’s transparent, professional, and ready for growth.
In short: Paying people under the table might feel like the easy route, but it can quickly turn into an expensive mistake. Do it right, stay compliant, and protect the business you’re working so hard to build.
