Off-the-Books vs. On-the-Books

As a business owner, an important decision you'll make is how to classify your workers and whether to add them to your payroll or pay them off-the-books. While paying workers off-the-books may seem like a good idea in the short term, it can lead to big problems for you down the line.

In this article, we'll take an honest look at the cost differences between adding your workers to payroll vs. paying them off-the-books, and what it means for your bottom line.

Payroll Tax Burden: What the Heck Is This?

As the employer, when you put your workers on payroll, in addition to their wages, you have to pay the extra employer payroll tax expense, or the "payroll tax burden."

The burden is a combination of the following employer-paid taxes: 6.2% Social Security tax, 1.45% Medicare tax, state unemployment tax, and workers' compensation insurance.

On average, this typically adds an additional 15% to your employee's wages, which is a significant added expense.

Payroll vs Off-the-Books - What's It Really Cost?

So, when you pay workers on payroll, you're paying both their wages and the payroll tax burden. However, when you pay them off-the-books in cash, you're only paying their wages.

For example, if you pay a worker $1,000 off-the-books, that's the total cost to you as the employer. But if you pay them as an employee on your payroll, you'll also have to pay the payroll burden, which brings your total cost to $1,150.

Why Does the Government Want You to Pay All Your Workers on Payroll?

The government wants everyone on payroll so they can collect their cut from both the employer and the employee. Collecting taxes from both adds up to a big number for the government.

In our example above, they are getting an extra $150 from the employer (payroll tax burden) and also getting $250 from the employee (withholding taxes).

So, on $1000 worth of wages, when you add both the employer and the employee amounts, the government is collecting $400 or 40% of the $1000 in wages. That's a lot!

Additionally, being paid as an employee on payroll is a requirement for employees to qualify and collect unemployment benefits. So, if your employee is ever laid off, they'll need to be on your payroll to easily collect their unemployment benefits.

Payroll vs Off-the-Books - What's the Legal Risk to You?

Paying workers off-the-books creates many legal and financial risks for you and your business.
Paying workers off-the-books is a violation of both federal and state labor laws.

And our government has two Departments of Labor ("DOL") - the Federal DOL and the State DOL. Two enforcement agencies to come after you.

If you're caught, you will face harsh fines and penalties, including back taxes and interest. This is a big number and can be financially devasting and stressful for many businesses.

In fact, chances are that you're personally liable for these infractions, which means if your business doesn't pay, the government can come after your personal assets, like your house, to collect this debt from you.

So unless you're making a million dollars, it's probably not worth taking this risk. That's why payroll is such a big deal, and complying with the payroll regulations is critical. You don't want to find out the hard way.

Why Would Your Employees Prefer to Get Paid on Payroll?

Getting paid off-the-books creates some major challenges for your workers. What if your worker wants to buy a house and get a mortgage? They need to show payroll stubs and W-2s. Even if they want to rent an apartment, they need payroll stubs.

Same thing if they want to purchase or lease a car. They need payroll stubs to prove their income. If they are paid off-the-books, they don't have these documents, and they're screwed.

Many employees know this and, because of this reason alone, would prefer to be paid on payroll.

So, all in all, adding your workers to payroll may initially seem like a hassle and you expect to get push-back from your workers.

But in reality, this might not be the case.

The bottom line is you must look out for #1 - yourself and your family. The personal risk is real, and taking chances by paying your workers off-the-books is like playing with fire. You keep doing it, and eventually you're going to get burned.

By paying your workers on-the-books, you'll be protected from fines and penalties, and your employees will have workers comp insurance in case they ever get injured on the job.

Do you have ITIN workers not on payroll? Most payroll companies won't allow you to include ITIN workers on your payroll. But thankfully, Baron Payroll will include your ITIN workers on your payroll!

Read this article to learn more about how Baron Payroll will add ITIN employees to your payroll!

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