Working or paying someone under the table is illegal when the wages go unreported, taxes go unwithheld, and the required insurance never gets paid — and that’s almost always the point of the arrangement. Cash itself is fine. An employer can legally hand an employee cash on payday as long as taxes are withheld, the employer’s share is paid, and the wages are reported to the IRS. The violation is the hiding, not the currency. Both the worker and the employer break federal law when they agree to keep the job off the books, and the penalties stack from back taxes and civil fines up to felony prison time.
The IRS is explicit that virtually all income is taxable unless a specific law exempts it, and you must report it even if no W-2 or 1099 ever reaches you. 1Internal Revenue Service. Taxable Income So the legal exposure is created the moment the income is left off a return, not the moment cash changes hands.
What the Worker Is Doing Wrong
A worker who accepts under-the-table pay is committing tax evasion, even if the employer proposed the arrangement. Failing to report wages on your return violates the basic requirement to report all taxable income regardless of what paperwork you did or didn’t receive. 1Internal Revenue Service. Taxable Income
You’re also skipping the employee share of FICA — 6.2% for Social Security and 1.45% for Medicare — that would normally come out of each paycheck. 2Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates These aren’t optional contributions. They’re legally required deductions that fund your own future retirement and disability benefits.
What the Employer Is Doing Wrong
An employer who pays off the books is usually violating several federal laws at once.
Payroll Taxes
Every employer must withhold the employee’s 6.2% Social Security and 1.45% Medicare tax and pay a matching share. 3Office of the Law Revision Counsel. 26 USC 3102 – Deduction of Tax from Wages The Social Security portion applies to wages up to $184,500 in 2026. 4Social Security Administration. Contribution and Benefit Base Off-the-books pay bypasses all of it.
Unemployment Insurance
The Federal Unemployment Tax Act imposes an effective rate of 0.6% on the first $7,000 of each employee’s annual wages, and employers also owe state unemployment taxes. 5U.S. Department of Labor. Unemployment Insurance Tax Topic Neither gets paid when the worker doesn’t officially exist.
Workers’ Compensation
Nearly every state requires workers’ compensation insurance to cover medical bills and lost wages after on-the-job injuries. An employer with no official employees typically carries no policy, which leaves the business personally liable when someone gets hurt.
Wage and Hour Rules
The Fair Labor Standards Act requires at least federal minimum wage, time-and-a-half for overtime, and accurate records of hours and pay. 6U.S. Department of Labor. Fact Sheet 21 – Recordkeeping Requirements Under the Fair Labor Standards Act Cash-only arrangements rarely include real time tracking, which makes it easy to pay below minimum wage or shortchange overtime.
What Happens to the Worker if Caught
Back Taxes, Penalties, and Interest
If the IRS discovers unreported income, you owe the back tax plus interest that compounds daily from the original due date. 7Internal Revenue Service. Topic No. 653, IRS Notices and Bills, Penalties and Interest Charges A failure-to-pay penalty of 0.5% per month runs up to 25% of the unpaid balance. If the underpayment is attributed to negligence, an accuracy-related penalty of 20% of the underpaid amount applies on top of that. 8Internal Revenue Service. Accuracy-Related Penalty If the IRS determines the underpayment was fraudulent, the penalty jumps to 75% of the fraudulent portion. 9Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty
No Time Limit on Fraud Cases
The IRS normally has three years from a filed return to assess additional tax. For a fraudulent return, or a year you never filed at all, there’s no deadline. The IRS can come after you decades later. 10Office of the Law Revision Counsel. 26 USC 6501 – Limitations on Assessment and Collection Workers who assumed old cash jobs were safely in the past often discover the clock never started running.
Criminal Charges
Willful tax evasion is a felony carrying up to five years in prison and a fine of up to $100,000. 11Office of the Law Revision Counsel. 26 USC 7201 – Attempt to Evade or Defeat Tax Willful failure to file is a misdemeanor punishable by up to one year in prison and a $25,000 fine. 12Office of the Law Revision Counsel. 26 USC 7203 – Willful Failure to File Return, Supply Information, or Pay Tax Civil penalties are far more common than criminal prosecution, but the IRS does prosecute, especially when the amounts are large or the pattern long-running.
Lost Social Security and Safety-Net Access
In 2026, every $1,890 in reported wages earns one Social Security credit, and you need 40 credits — roughly ten years of work — to qualify for retirement benefits. 13Social Security Administration. Quarter of Coverage Wages that never hit a W-2 never credit your record. Years of off-the-books work can leave you short of the minimum for retirement or disability, and the gap is extremely difficult to fix after the fact. The same silence on paper also disqualifies you from unemployment benefits and workers’ compensation if you lose the job or get hurt.
What Happens to the Employer if Caught
Full Liability for Unpaid Employment Taxes
An employer caught paying under the table owes all unpaid FICA, FUTA, and state employment taxes, including both the employer and employee shares, plus interest and penalties. 14eCFR. 26 CFR 31.3202-1 – Collection of, and Liability for, Employee Tax
The Trust Fund Recovery Penalty
Federal law treats withheld income and FICA taxes as money held in trust for the government. Any person responsible for collecting and paying over those taxes who willfully fails to do so faces a penalty equal to 100% of the unpaid trust fund amount, assessed personally. 15Office of the Law Revision Counsel. 26 USC 6672 – Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax The IRS can reach the owner’s personal bank accounts and assets even if the business is an LLC or corporation. The penalty can apply to anyone with authority over the company’s finances, including officers and sometimes bookkeepers.
Criminal Exposure
Willful failure to collect or pay over employment taxes is a felony punishable by up to five years in prison and a $10,000 fine. 16Office of the Law Revision Counsel. 26 USC 7202 – Willful Failure to Collect or Pay Over Tax Separate tax evasion charges can add another five years and $100,000. 11Office of the Law Revision Counsel. 26 USC 7201 – Attempt to Evade or Defeat Tax State penalties for missing unemployment contributions or workers’ compensation coverage stack on top.
Direct Liability for Workplace Injuries
When an uninsured worker gets hurt, the employer typically becomes personally responsible for all medical costs and lost wages. One serious injury can financially end a small business, and most states impose separate fines for operating without workers’ comp coverage.
If the Worker Isn’t Authorized to Work in the U.S.
Under-the-table pay often involves workers who lack work authorization, and that raises the stakes on both sides. Federal law makes it illegal for employers to knowingly hire unauthorized workers, and every new hire must be verified through Form I-9. 17Office of the Law Revision Counsel. 8 USC 1324a – Unlawful Employment of Aliens Cash-only hiring skips that process.
Civil fines escalate with each offense: up to $5,724 per worker for a first violation in 2026, up to $14,308 for a second, and up to $28,619 for a third or later. 17Office of the Law Revision Counsel. 8 USC 1324a – Unlawful Employment of Aliens A pattern of violations exposes employers to criminal penalties including up to six months in prison. For workers, unauthorized employment can bar adjustment to lawful permanent residence under most circumstances, though immediate relatives of U.S. citizens and VAWA self-petitioners are exempt from that bar. 18U.S. Citizenship and Immigration Services. Inapplicability of Bars to Adjustment
Hiring a Nanny or Housekeeper Counts
People who hire a nanny, housekeeper, or home caretaker often don’t realize they’ve become an employer with real tax obligations. In 2026, if you pay a household worker $3,000 or more in cash wages during the year, you must withhold and pay Social Security and Medicare taxes. 19Internal Revenue Service. 2026 Publication 926 You also file Schedule H with your personal tax return and may owe federal and state unemployment taxes.
The arrangement feels informal, but the IRS treats it like any other employment relationship once you cross the threshold. Paying a babysitter $50 for a Saturday night doesn’t trigger these rules. Paying a nanny $600 a week does.
Getting Back on the Right Side of the Law
If you’ve been working off the books, or paying someone off the books, fixing it before the IRS finds you dramatically reduces what you’ll owe and the risk of criminal exposure.
If You’re the Worker
When an employer should have given you a W-2 but didn’t withhold taxes, Form 8919 lets you calculate and report your share of uncollected Social Security and Medicare taxes. 20Internal Revenue Service. About Form 8919, Uncollected Social Security and Medicare Tax on Wages For past years, you can file amended returns on Form 1040-X, or file delinquent original returns for any year you skipped. 21Internal Revenue Service. Topic No. 308, Amended Returns You’ll still owe back tax and interest, but voluntary filing typically brings smaller penalties than getting caught.
For willful noncompliance involving larger amounts, the IRS Voluntary Disclosure Practice exists. It doesn’t guarantee immunity from criminal prosecution, but a timely, truthful disclosure made before the IRS contacts you significantly reduces the risk. 22Internal Revenue Service. IRS Criminal Investigation Voluntary Disclosure Practice Once the IRS has opened an examination or received a tip, the window closes.
If You’re the Employer
Start by putting every worker on the books going forward: set up proper withholding, get an Employer Identification Number if you don’t have one, and begin issuing W-2s. For past periods, file delinquent employment tax returns (Forms 941 and 940) and pay what’s owed with interest and penalties. The longer you wait, the larger the bill and the more the failure looks willful rather than negligent, which is the distinction that separates civil penalties from criminal charges.