hiring "under the table" labor

[Tim Robinson]

i am new to real estate investing, I actually have not even done a deal yet. This is something that I have been pondering for some time now.  I often see people do jobs and get paid "under the table". To be honest, I myself, when I was in my 20's did jobs like this. Put on a new roof, maybe a vinyl siding job, a flooring job, or some landscaping.  I feel like our society accepts a lot of under the table jobs like its no big deal. I mean you pay the neighbor kid 30 bucks to mow your yard. No big deal, right? Lets say you got a permit to put on a new roof, instead of doing it yourself, you pay a couple coworkers 400 bucks each to help you out. No big deal, right? My question is this... Is it a big deal? Is there a line drawn between legal and illegal? what sort of trouble could this land you in?  And just to be clear, its not like I would pay some yahoo to put on a roof, but I do work in an industry where I literally know dozens of guys that are knowledgeable on how to do work like this.  And, I guess another question would be, what is the legal way for one person to hire another person to do labor?

Thanks
 

[Aaron McGinnis]

It isn't a big deal... until it is.

How about that guy you paid $400 to work on your roof calls you up and says, "Hey man, pay me another $4000 or I'm going to report you to the IRS, the DOL, and maybe the DHS for acting illegally. Also, I think my neck hurts and it's related to the job you hired me for, and since I don't have no insurance you're gonna have to pay for it."

Or, "I got a bug bite and it got infected and I went to the emergency room for it. Here's a bill for $4000, you can either pay it or I'll report you to the IRS, the DOL, and maybe DHS and we'll let the judges sort things out"

Or worst of all, the guy you paid $400 to do something falls off a ladder and breaks his neck. Now his baby mamma calls you and says that you're responsible for him as an employee since he was using your tools and working hours defined by you. You owe her for the hospital bill, the lost income, pain and suffering, etc.

Orrr... you hire someone for $400 to do something, and give him a 1099 at the end of the year. He decides he doesn't feel like paying self employment taxes at the end of the year, talks to a friend or a lawyer or an accountant and realizes that he was legally an employee. The paperwork you gave him won't help you in court - he was an employee because he met the criteria for being an employee. Oh yeah, also his neck hurts due to an injury he got on the job.

OOORRRR... you hire the same guy for a few months and pay him 1099 regularly. Then he shows up drunk or high to the job and you tell him to get lost. He goes to the DOL and files for unemployment. Your 1099 paperwork will not help you because, legally, he was an employee. Now you must pay his unemployment bill or face a host of alphabet agencies who are convinced you are the devil incarnate. 

OOORRRRR.... you have a ton of regular 1099 employees. A pandemic happens and your business goes south. You want to apply for the PPP loan, but none of your 1099 employees qualify as regular payroll because "Dem's the rules, kiddo"... you are left out.

Do not laugh, do not cry, do not pass go. I have personally seen all of the above happen.