"Correct" way for someone working under the table in the US to pay FICA taxes

Question

Income earned from work in the US, or by US residents, is subject to US income tax regardless of whether the nature of the work is legal. In fact, Publication 17 specifically talks about how to report income from illegal activities:

Illegal activities. Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Schedule 1 (Form 1040), line 8z, or on Schedule C (Form 1040) if from your self-employment activity.

So clearly, income from working "under the table" is also subject to US taxes (income tax and payroll taxes), and need to be reported on one's tax return. In fact, people who worked in the US without authorization are often encouraged to file tax returns and pay taxes on their income from unauthorized work, which may be looked upon favorably in any future immigration process they may qualify for. Some of those people will have worked "under the table" and will not have received a W-2 from their employer, nor have had taxes withheld. My question is what exactly is the "correct" way to complete their tax return (as far as tax law is concerned).

I understand that, for people who are independent contractors, they can report their income on form 1040 Schedule C even if they did not get a 1099, and they can calculate self-employment tax on form 1040 Schedule SE. But for people who are employees, it is more complicated. (And whether someone counts as an employee and independent contractor is determined by the facts; an employee cannot simply "choose" to file as an independent contractor.) Although an employee's wages can be reported on form 1040 line 1 (wages, salaries, tips, etc.), how would they report the Social Security and Medicare tax that they need to pay?

IRS's instructions for what to do if an employee does not receive a W-2 on time, says to 1) call the IRS, and the IRS will contact the employer for them, and 2) if they still do not get a W-2, file form 4852 as a subsitute for the W-2. However, someone who is working under the table would probably not want the IRS to contact their employer, which wouldn't help since the employer is intentionally not reporting the income, instead of an unintentional omission. And the employee might fear retaliation from the employer if the employee caused the IRS to contact the employer, since the employer is probably trying to avoid attention from the IRS. Therefore, what is the best course of action for the employee in this case? Just file form 4852 by itself, without calling the IRS?

If the employee fills out form 4852 as a substitute W-2, they can enter the correct amount of wages, and they can enter 0 for the withheld taxes if no taxes were withheld. The lack of withheld income tax is not a problem since the amount of tax that needs to be paid is reconciled on the tax return (overpayment is refunded while underpayment needs to be paid), and the employee can otherwise make estimated tax payments to avoid underpayment. However, how would the employee deal with the underwithholding of FICA taxes (Social Security tax and Medicare tax), since these taxes are usually not entered on the tax return? Answers from past questions about underwithholding of FICA taxes due to F1 students switching from nonresident to resident (see this and this) seem to indicate that it's entirely the employer's responsibility to pay the employer and employee parts of FICA taxes to the government (and the employer can recover the money from the employee). But in a case of an employer employing someone "under the table", the employer is unlikely to pay the tax. Does the employee not need to do anything to pay the tax on their tax return? (Is there even a way for the employee to add underwithheld FICA taxes to their tax liability on their tax return if they wanted?)

Answer 1

Answers from past questions about underwithholding of FICA taxes due to F1 students switching from nonresident to resident (see this and this) seem to indicate that it's entirely the employer's responsibility to pay the employer and employee parts of FICA taxes to the government

Yes, that's true. That's true for any employee. See IRC Sec. 6205 (and the CFR for it).

But in a case of an employer employing someone "under the table", the employer is unlikely to pay the tax. Does the employee not need to do anything to pay the tax on their tax return?

FICA taxes are payroll taxes and should be deducted through payroll by the employer.

That said, without paying them the employee will not be earning their SSA credits and disability coverage, so it's in their best interest to make sure the employer is compliant.

Is there even a way for the employee to add underwithheld FICA taxes to their tax liability on their tax return if they wanted?

Not in a proper way. The employee may improperly represent themselves as self-employed, but that would be a fraudulent return.

---

You're describing a situation where the income is earned illegally. Surely it's not surprising to you that there's no way to legalize the income on the tax return without admitting that it was earned through a violation of the law (Clarification: the violation is of the employer, employee reporting such a violation would probably be considered a whistle-blower).

In many cases, taxes is the only way to actually prosecute and convict law breakers even though "everyone knows" they're criminals. E.g.: Al Capone.

Employers, and key individuals working for such employers, are liable for severe penalties in situations as the one you've described (see here). While it may be hard to prove other crimes committed (human trafficking, racketeering, drug- or violence-related offenses, etc) - money always leaves a trail and catching a mobster on a payroll violation is still catching a mobster.

Answer 2

And whether someone counts as an employee and independent contractor is determined by the facts; an employee cannot simply "choose" to file as an independent contractor.

Kind of, but it's not very rigid, and most being paid under the table likely have a relationship that is less like employee/employer.

From IRS site - Independent Contractor (Self-Employed) or Employee?

Facts that provide evidence of the degree of control and independence fall into three categories:

1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another.

Regardless of which classification would win out in court in any given situation, people getting paid under the table typically have no interest in risking their income to get their employer to do things correctly or don't even think anything is wrong with their situation.

Usually, the best option for such individuals to do things correctly from a tax perspective is to report self-employment income and pay self-employment tax. If they are inclined to challenge their classification they can do so, but if it is determined that they aren't an employee it will be better to have already paid their full self-employment tax when initially due.

To be clear, I'm not saying this is how it should be. The reality is that employer retaliation can be a real concern, and in that case the best option for many people paid in cash is to claim it as self-employment income.

If people believe they are misclassified and feel that they can safely report their employer to the IRS they certainly should.