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Underground Economy Operations

Learn more about the impacts of California’s underground economy, how to report fraud, and our efforts to reduce unfair business competition and protect the rights of workers.

We investigate businesses that avoid paying payroll taxes, many of which are part of the underground economy. If you would like to help us protect workers and create fairness for business competition, you can do one of the following:

"Underground economy" is a term that refers to people and businesses that deal in cash or use other schemes to hide their activities and their true tax liability from government licensing, regulatory, and taxing agencies. Underground economy is also known as tax evasion, tax fraud, cash pay, tax gap, payments under-the-table, and off-the-books.

The actual size of the underground economy is difficult to measure. In September of 2019, the IRS released a new set of tax gap estimates for tax year 2011-2013. The tax gap is defined as the amount of tax liability faced by taxpayers that is not paid on time. After adjusting for audit and collection activities, the IRS estimates that in 2011-2013 the net national tax gap was approximately $381 billion.

Reports on the underground economy show significant impacts on:

  • The State of California.
  • Businesses that comply with the law.
  • Workers who lose benefits and other protections provided by state law when the businesses they work for operate in the underground economy.

Businesses

When businesses operate in the underground economy, they illegally reduce the amount of money used for insurance, payroll taxes, licenses, employee benefits, safety equipment, and safety conditions. These types of employers then gain an unfair competitive advantage over businesses that comply with the various business laws. This causes unfair competition in the marketplace and forces law-abiding businesses to pay higher taxes and expenses.

Workers

Employees of noncompliant businesses are also affected. Their working conditions may not meet legal requirements, which can put them in danger. Their wage earnings may also be less than those required by law, and benefits they are entitled to can be denied or delayed because their wages are not properly reported.

Consumers

Consumers can also be affected when contracting with unlicensed businesses. Licensing provisions are designed to ensure minimum levels of skill and knowledge to protect the consumer.

The worst consequence is the reduction of economic stability and working conditions in California. Our brochure Paying Cash Wages “Under the Table” (DE 573CA) (PDF) | Spanish (DE 573CA/S) (PDF) outlines some of the costs and effects of cash pay on your business, your employees, and taxpayers in general.

We are concerned about workers who lose benefits and other protections provided by state law when the businesses that they work for operate in the underground economy. When businesses operate in the underground economy, they gain an unfair advantage over businesses that comply with the law. This causes unfair competition in the marketplace and forces law-abiding businesses and every citizen in California to pay higher taxes. Our Underground Economy Operations (UEO) organization was established in 1993 to implement and administer the activities of the Joint Enforcement Strike Force. The mission of the UEO is to reduce unfair business competition and protect the rights of workers by:

  • Coordinating the joint enforcement of tax, labor, and licensing laws.
  • Finding and deterring payroll tax violations in the underground economy. This includes unreported cash pay, wages reported on Forms 1099, and unreported or unpaid payroll tax deductions.
  • Conducting research to identify strategies to increase compliance with payroll tax laws.
  • Educating customers on UEO programs to increase compliance with payroll tax laws.

The UEO program has three key focus areas:

Joint Enforcement Strike Force

On October 26, 1993, the Governor signed Executive Order W-66-93, which created the Joint Enforcement Strike Force on the Underground Economy (JESF). The Governor subsequently signed Senate Bill 1490, which placed the provisions of the Executive Order into law as Section 329 of the California Unemployment Insurance Code, effective January 1, 1995.

We are the lead agency for the JESF, and the Director of the EDD is the chairperson. The JESF is responsible for enhancing the development and sharing of information necessary to:

  • Combat the underground economy.
  • Improve the coordination of enforcement activities.
  • Develop methods to pool, focus, and target enforcement resources.

The JESF is empowered and authorized to form joint enforcement teams when appropriate to utilize the collective investigative and enforcement capabilities of JESF members.

Refer to the Joint Enforcement Strike Force for more information.

Other JESF members include:

Employment Enforcement Task Force

The Employment Enforcement Task Force (EETF) is the first program implemented by the JESF. The EETF works with the JESF partner agencies to conduct joint on-site business inspections to identify employers who operate in the underground economy. The goal of the EETF is to identify and bring into compliance those individuals and businesses participating in the underground economy that are in violation of payroll tax, labor, and licensing laws.

To minimize the disruption of businesses that comply with federal and state laws, the EETF conducts investigations only if there is reasonable belief that businesses are violating provisions of the:

  • California Unemployment Insurance Code
  • California Labor Code
  • Business and Professions Code
  • California Insurance Code

Refer to the JESF’s Annual Reports to review the results of EETF activities.

Participating agencies in the EETF include:

Labor Enforcement Task Force

The Labor Enforcement Task Force (LETF), under the direction of the California Department of Industrial Relations, is a coalition of California state government enforcement agencies that work together and in partnership with local agencies to combat the underground economy. In this joint effort, information and resources are shared to ensure that employees are paid properly and have safe work conditions and that honest, law-abiding businesses have the opportunity for healthy competition.

Members of the LETF include the:

e-Services for Business

Use e-Services for Business to manage your employer payroll tax account online.

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Contact Us

If you have questions, Contact Payroll Taxes. You can also contact the Taxpayer Assistance Center at 1-888-745-3886 or visit your local Employment Tax Office.

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