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.
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
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 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.
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Ugh… Lots of things are happening around the freelancer business. Never heard about these things earlier. I assume all these things confine only to a particular country or a set of countries. What about online market places and other countries. Lots of things to know. Whatever it may be, we all know what is good for our own. Let’s not take the other route.
Really good article. Your are right about the worry, it can be enough to keep you up at night. I think everyone has had a few under the table jobs, especially when first starting out. I had a scare where the IRS did call me on the phone, luckily it wasn’t about my freelancing income, and it ended up being nothing, but it was enough for me to pay taxes on everything lol.
One thing that I learned is that taxes are part of the cost of doing business, if you can’t afford taxes then you are working for less than you should be and need to charge more.
It’s just silly to work under the table. Tempting, yes. But there are huge advantages to squeaky clean books, some of which you’ve listed here.
As my accountant once told me, “You never know when you’ll piss someone off. And the first thing they’ll look for to get back at you is how well you live and what you own. All it takes is one call…”
As is, I declare, but I also get to deduct a bunch of stuff. I can bring my papers to the bank any time and buy a house or car (which I did, which DID require heavy paperwork). I get to be considered for the Pension Plan of QC or Canada or whatever the government agency is that collects money for me. I get to pay lower taxes than if I worked for someone else, because I can deduct enough to bring it down to a nice amount that I can afford.
And if you can’t find deductions? Invest in your own business. The money you put into a better business and site improvements is all deductible too.
Agreed but- how much of a problem does it become when you report income that you didn’t get a 1099 for? This year, I have many clients who I’m sure won’t 1099 me, and some of them don’t need to because the projects were less than $600. I still need to pay taxes on the income though- is that going to raise weird red flags when I report non-1099 income?
@Yolander Not a problem at all. In fact, most of the freelanced income I’ve reported for the last two tax returns has not involved a 1099. I’m no tax professional, but my impression is that the IRS is far more concerned about people taking deductions that they aren’t legally allowed to take or not declaring income at all. By reporting income, you’re paying taxes on it. Just my two cents (pun unintended, but welcomed).
I too once did a sizable project “under the table”. The client paid me about two thirds of my fee with a promise of the rest to follow shortly after. It never came. In this situation, there’s no contract, no invoices, no recourse. And, it’s just not a professional way to do business.
As a freelance designer you are running a business, whether you are a sole proprietor or an incorporated entity. You don’t need to be a “tax professional,” but you do need to be professional. Claiming ignorance of the relevant laws won’t get you so much as a pat on the shoulder if and when the IRS comes knocking.
You are running a business, do it right. That means knowing how to pay your taxes and what you have to pay, or at the very least hiring someone who is qualified to do so. Anything else is personally and professionally irresponsible. If you’re unprofessional and unethical in your business finances, I’d expect that unprofessionalism to manifest itself in a number of other areas. Don’t hold your breath for success, you’re your own worst enemy at this point.
Why anyone would risk their personal and professional success and prosperity to save a few bucks is beyond me.
This is horrible advice. Is FS willing to back people up if they get caught/audited by their government? Regardless, not only is taking payment under the table unprofessional, illegal, could bite you in the ass later in life, but it sets you up to take shortcuts an scam at an early stage in your business.
Do the right thing, report your earnings. But by all means, deduct away! There are so many things you can deduct to bring you taxable income down (in the US at least).
You can’t stop people from scamming the system, but I would have hoped that a valuable resource such as Freelance Switch wouldn’t promote it as an option. You’re better than that.
In Africa ( Wont mention the country name) freelancers don’t pay tax … is that good or bad ? We just get it, i mean its a hustle and the IRS here are corrupt punks… why should we bother…
I have to agree with you Matt. Maybe I’m a bit bias because my father is an accountant but I know enough that it isn’t worth it. In Canada you don’t have to pay taxes until your income is at a decent amount. You can claim expenses. I don’t see any reason to work under the table. If you are cheating the government and your clients know it, they might think that you would cheat them as well.
Being from the UK, whats a 1099er?
How about the fact that not paying taxes on income makes you a leech on society? Everyone else pays their due.
You don’t understand how things work, do you? It is the IRS who are the leaches of society, not the working man. The income tax is right out of the Communist Manifesto. It is un-constitutional and un-American. I like making cash under the table, in fact the more the better. What I labor for with my own two hands is mine and mine alone, not the government’s. It is none of their business. I am sick and tired of their lies and their thievery. A warning to you government thugs out there; If you come into my house and trespass on my property without my permission, I will treat you like a common criminal, badge or no badge. I WILL defend myself. If anything bad happens to you, it is of your own doing, not mine. YOU HAVE BEEN WARNED!!!!!!
There is only one reason that I can see that a client would suggest working under the table: the client expects you to discount your price accordingly.
Since a payment to a vendor reduces a business’s taxes when they write off the expense, the only reason that the writeoff would not be worth taking would be if the business has no profits.
So there are two big problems with under the table work: it indicates that the client is financially unhealthy, and it amounts to sneaking around.
The most common way that new consultants get into trouble is by not handling their taxes properly…
Allways best to declare the money, the little saved is not enough to warrant the worry & stress caused by dodgy dealings, at the end of the year, i just hand over the books to the accountant and have him save me as much money as he can leagally – best way to do it… If you get investigated.. your in BIG trouble!
Great article! For me, working under the table kinda deal was great when I was a student and didn’t rely on that for living (since I was living at my parents). Back then, it was mostly a hobby on the side where I was charging $200 to design a logo and $100 for a business card. In my early 20′s, it was a decent chunk of money for me and a heck of a deal for my clients.
Passed that stage though, when your sideline becomes a real business, it becomes much more profitable to declare everything. It is in your client’s interests (since you reached a point where you cannot work for 20$ an hour anymore) and you reach an income level where it make sense to create your little company as a LOT of things can be deduct from your company. I came across a post recently on the 101 tax deductions for designer, check it out as the tax season is here!
http://www.wisebread.com/101-tax-deductions-for-bloggers-and-freelancers
Cheers!
I absolutely agree that it’s best to declare all income, if only so you won’t worry about it. A while back, I read a quote that said something like “What you get when you pay taxes is civilization,” and that’s actually helped me take a more positive outlook toward taxes. It doesn’t mean I want to pay more than I owe, but it helps me feel better about paying my share. (You’ve got to pay them one way or the other, might as well find something to make the medicine go down a little smoother.)
And speaking of not paying more than I actually owe, great list, David!
I agree, be as legitimate as possible. I’ve known a few that were burned by either the IRS or a client. It seems like a good idea sometimes, but in the end it’s just not worth it.
I’m frankly quite shocked by this article.
Doing work “under the table” is morally wrong. Why not fleece your client while your at it stealing from society. Sheesh!
Some commenters – such as Matt Crest or Enieh – should take this piece of Internet etiquette to heart:
Read the article before you comment.
If you had read it you’d know it was discouraging bad business practices, hmm?
I should perhaps elaborate my concern. The essay approaches the question from an egocentric “I could get caught” / “I could get other trouble” and then concludes with “[snip] but the simple fact is that if you take money under the table once or twice, you aren’t going to have a problem.”
Enieh – it states a fact, but doesn’t encourage it. Again, the entire article is about discouraging under the table operations. If I said, “The murder rate is high where I live,” does that make me a murderer, or does it mean I’m encouraging murder? Given the context of the rest of the article I don’t think your conclusion is an accurate one.
I don’t think the article was egocentric, either. I think bringing morality into the article would have weakened it, because it’s not a mere given that taxation is moral in the first place unless you’re brainwashed by the state. You feel comfortable paying for genocides, for bailouts to companies who operated in corrupt ways and should now be paying for it, etc? I’m not saying that taxation is immoral, I’m just saying that one’s stance on the morality of taxation is a personal issue, not a business one, and thus is a topic for another forum.
Screw the IRS.
@Joel Falconer – If the argument is that this article states the facts, and is therefore non-judgemental, I don’t think you can say it _discourages_ under the table operations. Indeed, it presents the issues and downsides of nefarious actions, but they are presented alongside the benefits.
I didn’t see anything like, “In the end, it’s not worth it. Don’t do it!”. I saw a summary of, “[...]but the simple fact is that if you take money under the table once or twice, you aren’t 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.”
It’s a slippery slope, and not worth it in my opinion. I probably came off a bit too harsh, but I did read the article in full. Maybe it’s just one of those things, like spec work, that some people feel very strongly about, and others are fine with.
@matt v
a 1099 is a form that a company gives you stating any payments they’ve made to you and how much of that price has been removed as taxes and sent to the IRS.
Usually when you have a regular 9-5 job or whatever you will be given a 1099 form every year showing how much you made during the year prior to taxes and then it says “Federal Income Withheld” stating how much of that income was taken out to be paid to the IRS.
I find it interesting that there seems to be a belief that paying taxes is a moral or ethical question. I’ve met someone who is a tax protestor — who believed that it was morally wrong for the government to charge income tax. Heck, the U.S. Supreme Court even declared income tax unconstitutional in 1895.
Working under the table is a fact of life for many people and I did make a conscious choice not to get into judgments in this article: I don’t think I have the right to do so.
*** Heck, the U.S. Supreme Court even declared income tax unconstitutional in 1895. ****
Uh, yeah, Einstein, which is why a subsequent Constitutional amendment (16th) was added to make it constitutional.
“The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”
So, uh, it’s not unconstitutional.
Re: “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.”
Conversely, there’s a reason some clients *do* want to pay in cash, and it’s because they didn’t acquire the cash legally in the first place. While it’s obviously not always the case, by participating in an off-the-books cash economy, you may be promoting societal ills that are much worse than trying to grab a few tax-free dollars.
I speak from experience, having discovered with relative horror where a few clients were getting the fat wad of cash they always wanted to pay me with. I work with a different kind of client today, but in years past, it was an eye-opener.
What if the payment was not from a corporation with a federal ID number or the like, how do I ask a client who wants a personal or non profit website for a 1099 without throwing them into confusion?
Another point to consider: if and when you go to sell your business, that income will not be on your books, and could potentially make your selling price less. Same thing goes for running personal expenses through business accounts.
>>What if the payment was not from a corporation with a federal ID number or the like, how do I ask a client who wants a personal or non profit website for a 1099 without throwing them into confusion?
You do not need to receive a 1099 to declare the income on your taxes, just keep track of your income and put that on your tax forms.
If the client company paid you more than $600, they are supposed to issue you a 1099 (and send a copy to the IRS). However, the fact that the client company does not issue a 1099 does not excuse you from declaring the income, and can get the client company in trouble with the IRS if they are ever audited.
(To clarify a different point, a 1099 is a form showing non-employee income for the year; a W2 is the form issued to employees and shows income and taxes withheld during the year.)
What’s the difference between God and the IRS/Revenue Canada? God will forgive you.
This article should start with a big disclaimer that says “NOT REPORTING YOUR INCOME TO THE IRS IS A FEDERAL CRIME. THE AUTHOR TAKES NO RESPONSIBILITY FOR ILLEGAL ACTIONS RESULTING FROM THIS ARTICLE.”
Otherwise… well, you do.
Hi guys. I’ve got a rather tough situation to ramble through, pertaining to the subject of working under the table. Here’s the skinny:
1. I’m a recent college graduate
2. Working at a gas station
3. Living at my grandma’s house
4. And, with all due respect, hating it
Here’s the scoop:
4. Recent job offer in Chi-town
2. Pays double what I earn now
3. Monthly rent will be provided for
4. The income is strictly under the table
That’s where I’m stuck at. The bossman prefers paying in cash because that is less hassle for him. Hiring me as an employee is outright not gonna happen, seeing as he could just as easily find someone else who would be more than willing to take the job.
As such, it might make sense for me to go into business for myself and work as a “consultant” for the bossman. It would not only afford me the luxury of filing my own taxes, but also to maintain a legitimate source of income for many years to come. I believe an arrangement such as this could be reached without much harangue.
Thanks for reading, and if you guys know of any flaws or disadvantages that this idea could present, any responses to the matter would be greatly appreciated.
I was working a satilite company , i felt it wasn’t safe ,so i quit but didnt have any proff or a reasonable reason ,to get unemployment, i was out of work three months looking for a job , my wife has ms an the stress of only one income coming in , stress is not good for ms , so when i was looking for a job my tires are in bad shape it was leaking ,so i went to a tire shop an got it fix then i ask if he knows of any jobs were available ,he gave me a name an place to go , i went over we talk a little about my skills ,i am an electrician by trade but theres no work in that trade that i can find , i did do a few electrical jobs in his shop not knowing i was getting paid in peanuts then it gets worst i use my vehical to deliver parts , they think you dont have a choice if you want to work , my days are number i know , i paid taxes , we are the goverment ,we owe trillions you don’t see anyone paying those , get me job that i can pay taxes
OK i have a ? can someone please answer i worked under the table for this one guy working constuction raising a house and me and him made a verbal agrement on $10 an hour and i worked 36 hours and i stopped working because my shoulder was hurting and he came to pay me and he said hes paying me $8 an hour instead of $10 is there any legal way i can get the rest of my money? he still owes me $72
One of a lucrative business that benefits under the table, is pan-handling. Like those on the roadways. (homeless)
And one of the highest income jobs (Prostitution) Or escort service.
How about the fact the IRS are a bunch of corrupted criminals that deserve to be put behind bars and be deported to Russia?
How about the IRS is unconsitutional anyways and many people are trying to outlaw them but the mainstream media refuses to report it and/or report it to make them (the protesters) look like terrorists?
How about whenever there is a budget crisis the IRS never and I mean NEVER takes a paycheck cut. If anything they will get themselves a raise while the poor peasents….I mean citizens have to foot the bill.
How about if you get in trouble the legal system is desgined in a way to make sure the IRS (and other government agencys) almost always wins the case and you will almost always be screwed.
How about……….I think you get the point.
In the 1700s when we were bullied by the kings of England with a bunch of crazy tax schemes it was illegal to do a lot of what we did *such as boycotting* but we fought back anyways and screwed up England’s taxing system since they refused to represent our votes and even those who were pure loyal to the king (Loyaltists) were more then often not recgonize either.
Are we not in the same type of situation today only with bigger tax schemes?
Boycotting was one of the first ways we got our own job systems in the USA where we refused to buy things from England and made our own products such as cloths/furniture/childrens toys/playing cards.etc
Often better quality too since the stuff didn’t need to be shipped so there was less risk of damage.
For most of my life we had stuff made in the USA or Japan and there was almost no problems of lead poisoning since when stuff were made here we could nip problems in the bud quite easily when they did crop up and Japan has lots of pride in quailty more then the USA due to the way their culture is based.
I have a question. If you provide documentation to a bank that you make X amount of money when applying for a home loan but you are only claiming to the IRS a very small percentage of that… is the bank obligated to inform the IRS of this? I’m very concerned for a dear friend who is in this situation and does not believe the business will ever get audited. Thanks for any input!!
I would estimate Billions are made without any with holding. Any cash business is easy to pocket as long as you don’t get greedy.