Underground Economy

Underground Economy (Paying Under the Table): 

What does paying cash wages “under the table” mean?

This common phrase means the payment of wages to employees by cash, check, or other compensation, that is disguised with the intent of avoiding the payment of payroll taxes.


Some excuses used to justify paying cash wages “under the table”:

v  Tax and insurance expenses associated with payroll are avoided.

v  An unfair competitive advantage is created.

v  Employees request no withholding on their pay.

v  Bookkeeping is reduced.

v  It is a common practice in some industries.


Other businesses in my industry pay cash wages “under the table,” so why shouldn’t I?

v  It is illegal and you could be criminally prosecuted.

v  This practice is financially dangerous to your business.


Are you really avoiding payroll tax expenses?   No!

Let’s compare two employers: Employer A is properly reporting.

Employer B is not, and is undergoing a payroll audit.




Employer A

Employer B

UI/ETT (3.5%)



1) State Disability Insurance (SDI  1.2%)



2) Personal Income Tax (PIT 6%)



3) Penalty  (120%)



4) Non-Registered Penalty



    Interest (@4)



5) Total due for 1 year




Employer A is reporting yearly payroll of $100,000 (five employees at $20,000 each). The payroll tax expense to this employer is for the Unemployment Insurance (UI) and Employment Training Tax (ETT) up to the wage limit of $7,000 per employee.

Employer B paid the same $100,000 in wages for the year. However, this employer paid cash wages

Under the Table, was audited, and did not keep records of payments made to specific employees. Therefore, this employer could not prove there were only five employees. An Employment Development

Department (EDD) auditor had to assess taxes on the full $100,000 in wages paid.


1)  SDI — normally withheld from the worker

2)  PIT may be abated. Refer to Information Sheet: Personal Income Tax Adjustment Process (DE 231W).

3)  Sections 1112.5, 1126, 1128A & B California Unemployment Insurance Code (CUIC)

4)  Section 1126.1 CUIC

5)  Calculations are based on year 2011 tax rates. Tax rates, interest, and penalties are subject to change each year.

    * Includes Paid Family Leave.

Note: UI and ETT are paid by you, the employer. SDI and PIT are paid by your employees. However, if you fail to withhold employee-paid taxes, they become your responsibility. (Aforementioned information derived for CA EDD Site)

Does it pay?    No!

As you can see, Employer B would pay almost 20 times more in State payroll taxes, penalty, and interest than Employer A. This liability will grow substantially when other governmental agencies become aware of the employer’s illegal activity. The survival of your business could depend on your ability to pay your tax liabilities, penalties, and interest.

What if my employees request cash wages under the table?”

v  Deny the request. This is not an option. You have a legal obligation to withhold payroll taxes and report your employees’ wages.

v  If your employees are injured on or off the job, they have the right to file a claim for Workers’ Compensation or SDI benefits. If your employees’ wages have not been reported, an investigation by the EDD will follow.

Are you really reducing your bookkeeping burden?    No!

 Initially this may be the case but when EDD finds unreported wages, you will be required to reconstruct payroll records for an audit. If fraud or intent to evade the law is found, the audit could go back to the beginning of your business. Thus, you could end up paying far more preparing for an audit than if you would had reported correctly from the beginning. (Aforementioned information derived for CA EDD Site)

If you have any questions concerning Underground Economy.


Please contact us at:


Cloud Payroll
7231 Boulder Ave. #526
Highland, CA 92346
Ph 909-657-6019