Communites Secretary Eric Pickles has told MPs that he finds Ken Livingstone's affairs "a very odd arrangement" when asked about it in the Commons on Monday afternoon.
Livingstone, who has campaigned against tax avoidance, has been criticised for paying himself via a company so he was only liable for corporation tax at 20%.
One of his employees was his wife, who had spent hours in their attic typing up his autobiography.
Describing himself as being "very shocked" at learning of the allegations, Eric Pickles told MPs: "I hope he has a reasonable explanation for why two people he employed were not properly declared."
Speaking on the Andrew Marr Show on Sunday, Livingstone claimed he had been smeared: "I am in exactly the same position as everybody else who has a small business. I mean, I get loads of money, all from different sources, and I give it to an accountant and they manage it.
"You pay corporation tax. If you then take out spending yourself, you have to pay more. What I am not doing is paying income tax on the money I use to employ other people."
"And at the end of they day, I end up paying the same amount of tax as I would do if I had taken the money out myself in income tax but I employ people.
"No-one is paying income tax on the money we use to employ people. If we did, unemployment would double in this country.
"I have paid all the tax on the money that has come to me but I am running a small company. I employed my wife for three years to sit in the attic and type up my autobiography to 700-pages and organise everywhere I go.
"The simple fact is, and the hypocrisy of all this, is Boris Johnson has exactly the same arrangements to handle his earnings from television. Almost everybody in the media, who is not employed directly, has exactly the same arrangements.