You have worked for 20 years to build your business, you have 100 employees and one of them comes to you for help. Joe is a supervisor and one of your better workers. He’s hardworking, always on time – someone you can depend on. He’s gotten into some financial problems and he asks you if you could just take him off payroll and pay him cash (under the table.)
You are a nice person. You want to help. It’s such a little thing. DON’T!
DANGER, WILL ROBINSON! DANGER!
10 years later Joe, who is still working off books, is injured on the job. It’s a serious injury and he won’t be coming back to work. He gets a lawyer and files a Workers Comp claim, but Joe is off book so he is not on your Worker Comp Insurance.
You could potentially have to pay Joe out of your pocket. The protections on the amount an employee can recover is gone and juries can be very generous.
Joe is an employee even if you did not pay him like one, you paid him quite a bit over 10 years, but you did not withhold or pay any payroll taxes on Joe.
The amount not paid to the IRS or the FTB is quite substantial, but that amount pales in comparison to the penalties and interest that have built up. That’s a civil matter, but there is potentially a criminal tax fraud issue here as well as with the Department of Labor, who is responsible for protecting employees. They could get involved and audit your payroll.
When an employee asks for a small favor, be very careful to judge the favor in light of the risk that it may expose you as the business owner to. There are other ways to help employees without putting you or your business at risk.