Whether you are working in the public or private sector, the past two years will have had a serious impact on your take-home pay. Even if you managed to escape the swingeing pay cuts that have eradicated the increases that employees fought hard for as the cost of living sky-rocketed in the boom, the state has been dipping its hand in your pocket anyway with higher taxes euphemistically disguised as levies and the increase and introduction of new stealth taxes.

People, many of whom over-extended themselves to get a mortgage on an overpriced house, are now seriously feeling the pinch, so it is almost inevitable that they will look for extra sources of income, and very often that will mean using their skills after hours. Whether it's a teacher giving grinds on the side or hairdressers offering home cuts, the recession has seen an upsurge in people working in the 'shadow economy' or doing 'nixers' to supplement their income.

The temptation to work cash-in-hand and hope that no one notices is high, but be warned, the Revenue Commissioners are on the lookout for anyone drawing in undeclared extra income and that includes PAYE workers.

"Revenue's audit and tax compliance programmes are under constant review to ensure that they are focused on the areas of greatest risk, including risks from a possible upsurge in the shadow economy, particularly in times of recession," said a Revenue spokeswoman. "We use all information available to us to target areas of risk, including local intelligence and third-party information."

It's easy to scoff at stories of taxmen roaming around small towns looking at noticeboards in search of teachers offering grinds, or retired women offering to clean houses, but those stories aren't far off the mark. The Revenue has a very sophisticated system called Reap (risk evaluation, analysis and profiling) which cross-references a variety of sources to track unusual activity. Certainly it would be foolhardy to think that, because you are a PAYE worker, your extra income is going to escape the Revenue's attention. It may take some time, but if you continue working long enough, they will eventually catch up with you.

Keeping things above board is simpler than you might think. Any extra money you earn above your normal salary will be subject to tax as normal at your marginal rate (standard rate at 20% or higher rate 41%) and the relevant levies. A high-rate taxpayer should probably be putting half of that extra income aside for tax purposes.

Depending on the level of additional income, the process of paying tax can be relatively easy and only moderately painful when it comes to handing over the money. If the additional income is low, it can be collected through the PAYE system by submitting Form 12.

Although filling out tax forms can be quite daunting in general, Form 12 is relatively easy, says Aidan Clifford, advisory services manager with the Association of Chartered Certified Accountants (Ireland).

"Form 12 is for someone who has PAYE income and a very small amount of private income. That form is about 14 pages long, is not particularly difficult to fill out and you don't need an accountant to do it. A lot of the form will not be applicable to most people. Send it to the Revenue in plenty of time before October and in most cases they won't even ask you for a cheque. They will deduct it from your tax credits over a period of three years and you won't notice it going," he said.

However, where the additional income is significant, you will be required to submit a self-assessed tax return. It should be noted that there may be unused tax credits that you can offset against your extra earnings and that allowable expenses can be deducted from gross earnings to arrive at a net taxable figure.

Being honest, if you are working with a neighbour for an hour or two a week for cash in hand, it is going to be difficult for the Revenue Commissioners to track you down, or indeed prove that you have an extra source of income. It is still illegal though, and if you're caught, you risk being landed with a significant bill from the Revenue. As well as the tax you failed to pay in the first place, the Revenue will charge interest – at a cumulative rate – on the tax owed. Depending on the circumstances, penalties can range from fixed fines to tax-geared penalties up to 100%, publication on the defaulter list and/or prosecution. Those nixers could prove very costly in the long run.

You should also consider whether the work you are doing leaves you open to claims in case of an accident, meaning you may require public liability insurance. This is not as fanciful as it sounds. For instance, if you are an IT contractor doing a bit of work on the side for a company updating its computer equipment and you accidentally spill a cup of coffee on their server, that company can make a public liability insurance claim against you. While it is by no means an absolute necessity – it probably wouldn't be worth the hassle if your nixer is just a one-off – it can do no harm to consider taking out some cover if you are planning to do extra work on a regular basis.

"While the proactive approach is commendable, there is real concern that these people are leaving themselves open to a serious financial risk," said Sean Burke of www.publicliability.ie. "We have found that the real issue is awareness. The cost of the insurance isn't usually a barrier to purchase… No one would hesitate to purchase cover for an average of €140 when the cost of non-insurance in the event of a claim could cost on average €25,000. However, many people don't realise that they could be exposed to a liability claim which could land them in serious financial difficulty unless they have the appropriate cover in place."