"Under the Table" Is Not a Business Model

As a serial entrepreneur and startup consultant to many successful businesses, I have observed cautionary business tales starting with "under the table." I'm here to tell you that even if money gets tight, you don't want to cut yourself off at the knees like them. What you need is a strategy that accommodates the big picture.

Why You Don't Want to Start and Run Your Business Under the Table

The IRS states that if you make $400 or more from a side hustle, you must file a tax return. If your hustle is meant to be profitable, it isn't considered a hobby to the government, and if you have aspirations, I’m sure it’s not a hobby to you, either. Before we discuss the rewarding benefits of picking the legitimate path, let's take a look at why illegally running a business is a short-sighted approach with negative consequences:

• ​It will affect your retirement. Social Security is based on the average income of your best ten years. So, in the long run, by reporting and paying your income taxes correctly, you are increasing your chances of a better retirement. It's the same for your employees on your payroll. It follows that if you aren't reporting all of your income, your social security checks will likely be less.
  

• Even if you are paying your help cash, they are considered a 1099-Misc Independent Consultant under specific criteria (if they don’t meet the requirements, they should be on your payroll), You still need to report any amount over $600 you pay an individual at tax time, whether they like it or not.  Furthermore, if you get caught paying your employees under the table, you'll be fined, and all of you could face jail time.
  

​​  

• While it may be challenging to commit to quality bookkeeping practices, the law requires business owners to keep a complete, organized set of books and records. It's easier to be an excellent bookkeeper if you keep your personal and business expenses separate, and it may become more difficult to cover business expenses when they co-mingle.

• There are many benefits of utilizing a business credit card for business expenses (for example did you know you can deduct the interest?), but you need proof of income, like copies of business financial reports, to qualify for one.

 

• You'll only be able to accept cash, which closes the door to many potential clients. You can't take checks made out to the business name, and even if they are made out to you personally, new laws will track payments deposited to your bank and on any cash apps. Not to mention, many customers will shy away from your business because when you only accept cash, that is a subliminal red flag for illegitimacy and untrustworthiness. 

Personal Credit Considerations

• It is difficult enough to get a home loan or refinance when you're self-employed (as it is considered less stable income), but if you can't even prove your income from your business, forget it. You need to prove you make as much as possible.

 

• You need the bank to approve taxable income for a home loan. The bank will ask for two years of tax records and 12-24 months of bank statements.

 

• Remember when I said that it's beneficial to have a business credit card?  It makes it much easier to refinance, so you can prove your debt-to-income ratio as required.

​

• Here’s another tip: Expect to be Googled by banks; your business must look legitimate.

Business Credit Considerations

• Renting commercial real estate is considered a "strategic investment in your future," according to TenantBase. To pass a rent credit and income check, you must provide an accurate W-2, a consistent tax form, bank statements, and verified pay stubs.

 

• If you can't prove you have a legitimate business, you can't buy wholesale.

Tax Benefits of Legitimate Bookkeeping

• If you pay your help under the table, you'll end up paying double the taxes on your employee expenses, even if you don’t report them. The money will appear to be income you need to pay taxes on, and you won't be able to subtract the payments from your gross income.

 

• Let's revisit that minimum of $400 in revenue you're required to file. Keep in mind, when you are reporting ALL your revenue, and ALL your expenses, it doesn't end up being $400 of taxable income, the same is true of any number. Read on to find out how.

 

• If you make enough money, you can receive significant savings if you can prove it. For example, if you bought medical insurance policies for yourself, you may qualify for the self-employed health insurance deduction. For work-related mileage, you can have car expenses deducted.

 

• When you reach the milestone of 100K gross sales, you can change your business structure from an LLC to a Corporation. This opens the doors for numerous tax benefits. One of them is that you can pay yourself payroll, have your income taxes deducted throughout the year, and then enjoy tax refunds off your losses instead of a heftier tax bill of upwards of 35% of your net.

For all of the above to happen, you must keep good expense records, set aside the appropriate amount of your net income to pay income taxes each quarter, and keep expense receipts, invoices, and statements from a business bank account. It helps to have a reputable bookkeeper, and in all cases, an accountant as well. (I am happy to share my rolodex of the business service professionals I have personally vetted to my business consulting clients.)

The Freedom of Marketing

• Do you want to make yourself look less successful to avoid getting caught? Keep the peace of mind that people see your business for what it truly is. Quality marketing boosts your reputation and helps clients spread the word. Instead of crippling your business, you embrace all the possibilities to grow!

 

• Covering your tracks takes a lot of extra time. As a business owner, you know that time is money.

The Psychological Benefits

When you decide to operate under the table, you subliminally decide not to reach for the sky.
​
Please don't misunderstand me. I am not saying that I love the taxation laws in America today. I am not saying that I disagree with you when you say that the middle class is overtaxed. I have felt the defeating feeling that it's nearly impossible to get a leg up when you're handing 35% of your income over to the government. But the journey from starting from nothing to achieving the echelon of incorporation proves something to yourself and the world. Anytime we accomplish the impossible in life, we learn we can do anything we put our mind to, and no one can take that away from us. Not to mention, you now appear to be well-founded, reliable, and experienced to creditors, landlords, and customers for time to come.

There are operational and tax strategies that you can employ along the way, with the help of a consultant like myself and a competent CPA, that can save you money. There are also organizations like the SBA who can offer you manageable loans that make sense and help you succeed faster.

How I Can Help

With 15 years of experience, I offer a variety of services that will help your startup grow, including business consulting and marketing. To succeed legally, fill out our contact form for a complimentary introductory consultation.
​
If you want to work under the table, consider whether you want to grow your business and change the landscape of your financial life. Instead, run your startup professionally. The patient sacrifice pays off!

Book a Consultation

*The information in this article is not to replace the advice of a Certified Public Accountant.

---

Rebecca LeClaire is the CEO of STS Media, Marketing and Consulting Agency, and has been helping small businesses grow since 2008 with Business and Marketing Consulting, Marketing, and Website Design.