First and foremost, it's illegal. If someone works for you as an employee, he is entitled to a paycheck with federal and state withholding taxes. If you pay someone who works for you as a subcontractor, he needs to be issued a 1099-MISC if paid more than $600 over the course of a year.
Secondly, both of you are negatively impacted when you don't pay according to the federal and state laws and regulations. For you the business owner if you pay someone under the table, then there is not any paper trail of the payments. In this case you cannot take the payments as an expense. Without the expense to your business, then your profit is higher than it should be and you end up owing more tax. In essence, you are paying that worker's taxes.
The worker is negatively impacted as well. He cannot claim the income which should get reported to the Social Security Administration. That could impact how much the worker should receive upon retirement. Another negative impact is the fact that if the worker qualifies for Earned Income Credit, the undocumented income could increase this credit.
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