Paying Cash Under the Table: The Real Risks
Paying workers in cash without paperwork? The risks are bigger than you think. Learn about CRA penalties, audit triggers, and how to come clean.
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Key Takeaways
- Paying "under the table" is tax evasion - a criminal offense
- CRA can assess back taxes for up to 6 years (indefinitely if fraud)
- Penalties add 10-50% on top of taxes owed
- Workers' Comp claims expose undeclared workers
- Voluntary Disclosure Program may reduce penalties
Why People Do It
Let's be honest. Paying cash is tempting because:
- Saves employer CPP/EI contributions (7.5%+)
- Workers like getting "more" (no deductions)
- Less paperwork
- "Everyone does it"
But the risks far outweigh the savings.
What Are the Actual Penalties?
Tax Penalties
- Back income tax on unreported income
- Employer CPP/EI contributions (7.5% of wages)
- Employee CPP/EI that you should have withheld
- Late filing penalty: 10% of amounts owing
- Repeated failure: 20% penalty
- Interest: 6-8% annually, compounded daily
Example: Paying $40,000 Under the Table
- Employee CPP/EI: ~$3,400
- Employer CPP/EI: ~$4,200
- Failure to deduct penalty (10%): $760
- Interest (assume 2 years at 7%): ~$600
- Total cost to you: ~$9,000 minimum
- Plus: Worker owes income tax on unreported earnings
Criminal Penalties
In serious cases, tax evasion is criminal:
- Fines up to 200% of taxes evaded
- Up to 5 years imprisonment
- Criminal record
How CRA Finds Out
Common Ways You Get Caught
- Disgruntled employee: They report you after a dispute
- Workers' Comp claim: Injured worker reports to WCB
- EI claim: Worker applies for EI, no ROE on file
- Income mismatch: Worker reports income you didn't
- Bank deposit analysis: Cash deposits don't match sales
- Industry audit: CRA targets cash-heavy sectors
- Lifestyle audit: Your spending doesn't match income
Workers' Compensation Nightmare
This is how many employers get caught. An unreported worker gets injured.
What Happens When Unreported Worker Gets Hurt
- Worker goes to hospital, mentions workplace injury
- WCB investigates the employer
- WCB finds no coverage for this "employee"
- WCB assesses back premiums + penalties
- WCB refers to CRA for payroll investigation
- You may be personally liable for medical costs
- Worker can sue you directly (no WCB protection)
How to Come Clean
Voluntary Disclosure Program (VDP)
CRA offers a program to fix past non-compliance:
- Must be voluntary (before CRA contacts you)
- Full disclosure of all issues required
- Pay back taxes + interest
- Penalties MAY be waived or reduced
- No criminal prosecution for tax matters
VDP Eligibility
- Information must be at least 1 year overdue
- Must include payment or payment arrangement
- Cannot be under audit for the issues disclosed
- Must be complete and accurate
How to Start Doing It Right
- Get a payroll number from CRA
- Have workers complete TD1 forms
- Calculate and withhold proper deductions
- Pay through documented means (cheque/transfer)
- Remit source deductions to CRA monthly
- Issue T4s by end of February
- Keep records for 6 years
It's Cheaper Than You Think
Yes, payroll costs money. But consider:
- Employer CPP/EI is tax-deductible
- Payroll is a business expense (reduces taxable income)
- Net cost is much less than gross cost
- And infinitely less than penalties if caught
Ready to Get Compliant?
Tax Punjabi can help you set up proper payroll and, if needed, navigate the Voluntary Disclosure Program confidentially.
This article is for educational purposes only. Consult a professional for your specific situation.