Freelancing Under the Table: The Pros and Cons
A few years ago, I did a couple of projects under the table for a local company. They paid me in cash, with a quiet understanding that they didn’t plan to issue me a 1099 and I didn’t plan on declaring that income.
I don’t work that way anymore, but I know the appeal.
There are a lot of negatives to such an arrangement — which led me to make sure my income taxes actually reflect my income — and it’s worth giving them some consideration before going one way or the other for cash-only arrangements.
Editorial Note: A few times a month we revisit some of our reader’s favorite posts from throughout the history of FreelanceSwitch. This article was first published in March 3rd of 2009, yet is just as relevant and full of useful information today.
The Pros of Working Under the Table
The biggest reason that freelancers have an interest in keeping income off the books is that it’s possible to avoid paying taxes on that money. When income tax, Social Security, state taxes and the other money the state takes can add up to half of a freelancer’s fee, it’s easy to understand the appeal. Freelancers certainly aren’t the only people operating on a cash-only basis: it’s a common approach for domestic workers, restaurant help and other employees working for small businesses.
Working under the table is illegal, of course, but that doesn’t mean that people don’t do it.
Cheaper for You, But Not for Clients
Depending on the project, a business may even be able to pass the cost of your work along to a client of their own.
There’s a reason that most of the businesses on your client list don’t want to pay you under the table. It’s more expensive for them. Unless you’re willing to offer a significant discount in exchange for undeclared income, it’s just not worth it.
Businesses, after all, can claim payments made to freelancers as deductible expenses — as long as all the paperwork is in order. Depending on the project, a business may even be able to pass the cost of your work along to a client of their own. Unless it makes financial sense not to, most businesses are going to find that declaring the money that they paid to you is the best approach.
To make matters more complicated, even if a client tells you that they’re willing to pay you under the table when you take the project, he can always change his mind later. You can’t stop a client from reporting your income to the IRS: any contract saying that you are to be paid under the table is void because a contract agreeing to any kind of illegal action cannot be enforced. There have been more than a few freelancers to get burned in such a situation: I’ve even heard of one client deciding that a project hadn’t gone as he expected. He turned around and issued a 1099 as a way to teach a freelancer a lesson.
The Big Bad IRS
There’s a reason that freelancers worry about the IRS — or the local equivalent. Unintentionally misreporting your income can get you in a lot of trouble: penalties, fines and more. If you do it intentionally, the consequences can be dire. Even if you don’t get caught, the worry can be enough to cause you problems.
Kelly Phillips Erb, the tax expert behind Taxgirl, points out that payments made under the table can only make your life harder: “…It’s just silly because you don’t know where you stand at any given time. There are way too many “what ifs” associated with being paid under the table. What if you get caught? What if you need to prove your income for purposes of getting credit, etc.? How do you reconcile that your tax statements won’t match your own income statements?”
Even just managing your own internal paperwork can be problematic. If you’re trying to keep a particular piece of income off your books, sending out invoices and making sure they get paid just got a lot harder.
It All Depends on Your Tax Return
As Kelly mentioned, not having a good idea of your income can really hurt you when you’re looking for credit. If you’re a full-time freelancer and thinking of buying a car, or a house, or anything that involves credit, you’re going to be asked for a copy of your tax returns. In the case of purchasing a house, you’ll need a minimum of two years of tax returns that show you have enough income to afford your mortgage payments.
Even renting an apartment can be complicated if you’re trying to move into a complex with an income requirement. Having a tax return that demonstrates your true income can be an absolute necessity.
The Facts of the Matter
The IRS may be the stuff your nightmares are made of, but the simple fact is that if you take money under the table once or twice, you aren’t necessarily going to have a problem. Even if a client reports income that you didn’t expect to pay taxes on, you can probably manage the situation.
If you make a habit of freelancing on a cash-only basis, though, sooner or later, you’ll have a major paperwork snarl — and you’ll probably wind up owing quite a bit of money. Before taking on a project under the table, think about the issues that go along with it. Consider how following the law and running your freelance business legitimately will avoid worry or potentially worse.
You should always seek independent financial advice and thoroughly read terms and conditions relating to any insurance, tax, legal, or financial issue, service, or product. This article is intended as a guide only.