WHEN YOU PAY YOUR EMPLOYEES LEGALLY, YOU PROTECT YOURSELF.
Besides being the law, there are many smart reasons why you should pay your employee "on the books". Here's our take on the top 6:
Avoid being sued. From a purely financial perspective, you are protecting yourself and your family from liability if your employee gets hurt ON the job or even OFF the job. On the job injuries that aren't insured can be financially debilitating for many families. You can easily obtain workers' compensation insurance to cover medical costs and lost wages (get more details here). If your employee gets injured OFF the job, or gets pregnant, and can’t work, you might need to find someone else and let the employee go. If paid legally, the injured employee would be protected by disability insurance. Your ex-employee could become upset if this coverage is not in place when needed, and could sue you for not following the law. Read here for details.
Avoid tax penalties and fines. If you and your employee part ways, regardless of the reason, your employee could find out that unemployment protection should have been available, plus social security and medicare should have been withheld. You’ll be on the hook for both the employee and the employer taxes as well as penalties and fines.
Protect your career. By following the law, you will reduce the risk of triggering a full audit and not jeopardize your career if you are an attorney, CPA, Doctor or other (especially licensed) professional.
Get a tax break. If your employee is taking care of a dependent such as your child or an aging parent, you could qualify for a dependent care tax break. You might even SAVE money. Read this post here to see what it costs an employer.
Increased family and household safety. Your employee, by agreeing or wanting to be paid legally, immediately sets a higher bar and can be seen as a true professional. Usually these household positions are intimate and critical to our family life, and we need trustworthy employees. Paying above board strengthens this trust both ways.
Employees receive benefits. Last but not least, it's great for your employee, who can qualify for unemployment and disability, contribute to social security and medicare and apply for loans, better housing options, and other benefits that require a work history. This strengthens our overall economy and reduces the burden on all tax payers.
For more information, the California EDD has a thorough and interesting analysis on why it's not worth it to pay under the table.