Taxes

Representative Michael Grimm and the Reasons Employers Pay Under the Table


You can read all about U.S. Representative Michael Grimm—the New York Republican indicted last week on charges that he paid workers under the table at a Manhattan restaurant he co-owned and managed—at Bloomberg News and elsewhere on the Internet. The U.S. government says Grimm, a former FBI agent, skirted federal and state taxes and lied under oath about cash payments. Grimm’s lawyer, Elizabeth Kase, says prosecutors are guilty of “abuse of power, the distortion of facts, and the targeting of political opponents.”

Beyond the mechanics and politics of the case, the Grimm indictment serves as a window into the world of employers who pay workers under the table. It’s a stratagem with obvious appeal, letting business owners report lower revenue, limiting income taxes, and lower wages, reducing employer contributions to cover Social Security, unemployment insurance, and other payroll levies.

Businesses that pay cash wages are hard for the government to track, says Catherine Ruckelshaus, general counsel at the National Employment Law Project, a labor rights advocacy group. She points to a 2008 study by her organization examining low-wage workers in Chicago, Los Angeles, and New York that found 93 percent of workers (PDF) paid in cash didn’t receive an itemized statement of earnings and deductions.

The absence of paperwork makes it easy for employers to pay workers less than the minimum wage, and presents an obstacle to employees seeking workers’ compensation or other benefits, Ruckelshaus says. It also makes it difficult for state and federal regulators to track how employers treat workers.

The Internal Revenue Service, another government body with an interest in tracking worker pay, also struggles to suss out employers that cheat on payroll taxes. U.S. businesses underreported employment taxes by $15 billion (PDF) in 2006, the last year for which the agency has published a detailed estimate—a small fraction of the $450 billion in underreported taxes that year. Viewed through another set of data (PDF), the IRS levied 6.8 million penalties for payroll tax infractions in the year ended September 2013, but only 230 of those fines were for employment tax fraud.

While enforcement actions have been rare, the penalties for business owners that come to the IRS’s attention are stiff. In March, the manager of a Chinese buffet in Waterville, Me., was sentenced to 14 months in prison for concealing $250,000 in wages, according to the agency’s website. Last August, the owner of a Los Angeles painting business was sentenced to 18 months for concealing $1.6 million from the government.

Those cases may be relevant to Grimm. Prosecutors say the lawmaker kept two sets of books and paid cash to “a significant portion” of employees at his restaurant, Healthalicious—a “protein shakes and power salads” joint on Manhattan’s Upper East Side. The indictment alleges that those tactics helped Grimm underreport gross sales by $1.3 million, and wages by “hundreds of thousands of dollars.”

Clark is a reporter for Bloomberg Businessweek covering small business and entrepreneurship.

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