Understanding the financial motive behind paying employees under the table

The incentive is primarily about avoiding ALL taxes and regulatory costs, not just payroll taxes. When someone pays "under the table," they're typically not documenting that expense anywhere - not on their Schedule C or anywhere else. Here's what they're trying to avoid: employer-side payroll taxes (FICA, FUTA, SUTA), workers' compensation insurance premiums, potential overtime requirements, minimum wage laws, and the administrative costs of complying with employment regulations. They're also passing the tax burden entirely to the employee, who often doesn't report the income either. You're absolutely correct that legitimate businesses lose the tax deduction for wages when they pay under the table. That's why this practice makes almost no sense for established businesses with significant revenue. The tax deduction for properly documented wages usually outweighs the costs of payroll taxes for legitimate operations.

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Former restaurant manager here. The "under the table" thing isn't always about tax avoidance on the business side. In my experience, it was often employees BEGGING to be paid cash because they were: 1) Trying to avoid child support garnishments 2) On disability/benefits and worried about losing them 3) Had tax liens against them 4) Were not authorized to work in the US Businesses that do this are taking HUGE risks, especially if they're making enough to be on the IRS radar. The penalties for employment tax evasion are no joke - I've seen businesses completely destroyed over this.

Can someone explain the actual math difference between paying properly vs under the table? If I'm paying someone $20/hr for 40hrs/week, what's the actual cost difference?