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?)