Also known as disguised pay, disguised remuneration is a type of compensation that is extended to an employee, in some form that is difficult to track for purposes of applying taxes. There are a number of ways to go about providing compensation in this manner, ranging from routing payments through trust accounts, third party organizations, pension plans based at an international location, and even paying cash for services rendered out of the employer’s petty cash fund. Typically, the process of paying remuneration in any way that seeks to circumvent current tax laws is considered unethical and may even be illegal in some instances.
Disguised remuneration often has to do with some type of additional rewards or benefits other than the base pay provided to the employee. For example, the reason for the compensation may be a bonus for meeting certain criteria related to the job or some type of one time pay for completing a project outside the scope of the usual job responsibilities. Rather than account for this reward or bonus as part of the regular pay and withhold taxes on the amount, the employer may choose to route the compensation through some sort of account or other financial arrangement that provides benefits to the employee but manages to avert the need to report those disbursements as taxable income.
There are several different strategies used to provide disguised remuneration to an employee. One of the more time-honored approaches is know as paying under the table. With this approach, the employer provides a cash payment to the employee outside the company’s accounting records. Since the disbursement is not reflected in the books as being compensation for services rendered, there is no real record of the transaction, circumventing the need to pay taxes. This approach may be used to provide payment for services rendered outside normal business hours, or for work on a project that is unrelated to the employee’s usual job responsibilities.
Several other methods may be used to provide disguised remuneration. Offshore trusts are sometimes used to route compensation through a process that ultimately benefits the employee. Disbursements to third parties who in turn pass the compensation on to the employee may sometimes be offered. In some nations there are even ways to issue some sort of employer-generated loan to the employee, with the balance of the loan eventually forgiven in some manner so that the employee never pays back the face value of that loan.
Increasingly, laws and regulations are being enacted that help to minimize the possibility of using one or more vehicles to provide disguised remuneration. This includes changing existing laws to close loopholes currently used to legitimately disallow the assessment of taxes on funds routed through certain processes, as well as create new legislation and procedures that preclude the use of certain methods to compensate employees, with failure to comply leading to the imposition of stiff fines. It is important to note that while disguised remuneration may be issued by an employer, the employee is often still held liable for any legitimate taxes owed, a situation that can create significant difficulties should tax agencies become aware of the unreported income.