A common misconception about business is that paying someone in cash under the table is a great way to save money. This is, however, risky and costly to your business. In this article, we’ll illustrate why.
Let’s say you’re an LLC with pass through taxation. Let’s also say you’re the sole owner of the company and you find yourself in the 25% tax bracket. Since you’re working in your business, you’re also paying the self-employment tax of 15.3%.
The great thing about salaries is that they’re deductible from your company’s bottom line. Therefore, if your company has to pay someone $40,000 to complete a job, there is $40,000 less income that has to be taxed when it gets to you.
So, look at this math with a company that earns $200,000 per year after all costs except salaries:
|Salary||FICA Paid by Company||Total Paid||Self Employment Tax||Income Tax||Total Taxes||Money In Pocket|
|Under the Table||40000||0||40000||30600||34700||65300||94700|
|Above the Table||40000||3060||43060||24011.82||27229.09||51240.91||105699.09|
Notice that when you choose to not pay under the table, you yourself will pay much less in taxes. At the end of the day, someone will be paying those taxes, so helping your employee avoid $3,000 worth of taxes can cost you $11,000. Why not come to a compromise? You can pay your employee $5,000 more to be an employee with regular documented paychecks and still save $6,000 in taxes yourself.
Beyond this simple math, you also have enormous federal and state tax issues with not reporting income. You will also have the potential for incredible fines from the department of labor for not properly documenting your employee, maintaining unemployment insurance and more. These investigations from the department of labor and tax offices are very expensive, time consuming and stressful.
Don’t become a victim of bad advice, these policies of documenting your employees’ income are to protect you, the business owner, from serious fines and other criminal penalties. On top of that, you save money in your own taxes once you comply with the proper legal requirements.
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