Underground Economy Operations

                     State Increases Efforts to Identify Tax Evaders

A:  What a tough — and absolutely common — problem. Under-the-table salaries are a significant thorn in the IRS's side.

A couple of things:

First, get, train, and maintain a first-class work force so that you can compete on quality even if your costs are somewhat higher than a rival's.

Second, educate your employees about the good things that come from being on the books. Yes, there are lots: They'll squirrel away some Social Security benefits, you can set up a 401(k) or other private retirement plan to supplement Social Security, and they can get insurance and other family benefits such as medical and child-care pretax savings accounts. This will make them happier and more productive.

Third, watch your pennies everywhere you can. Those outlaw competitors won't have the same incentive that honesty gives you, and I bet you can make up some of the disadvantages with a sharper pencil.

And forth, heaven forbid the worker should hurt themselves on the job and need medical attention. The law suits and problems that come from not carrying Workers' Compensation Insurance as required by State law will be more than just time consuming - it will be very expensive and you could loose your business.

In addition, you actually pay more income tax when you pay "under the table" than you could ever save by not paying payroll taxes and workers' comp premiums. Here's an example:

I pay my employee $1000 "under the table" I save approximately 10% in payroll taxes. That equals a "savings" of $100. Now, where did I get the $1000 to pay this employee? I got it out of my own money (net profits). If you're in the 30% tax bracket, like most small business owners are, that means that you pay 30%, or $300 in taxes per $1000 taxable income. You paid income tax on the money you paid "under the table".

So if I expense $1000 payroll to my business, I decrease my taxable income by that amount. I can also expense my share of payroll taxes. Remember, I'm in the 30% tax bracket so if I don't write off the $1000 payroll expense my taxable income has increased that much so could I pay about $300 in income taxes per thousand.

I saved $100 to spend $300. I don't get it.

Also this may sound silly to some, but there's also great value in sleeping soundly at night and "not having to peek out the blinds". There is really more than a theoretical risk in doing things the wrong way. No matter how powerful the small business lobby is in Washington, tax withholding on paychecks is what guarantees cash flow to the government, and the IRS regularly goes after violators. Don't you have enough to worry about without that!