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How do Undocumented Immigrants Pay Federal Taxes? An Explainer

By Hunter Hallman

Wednesday, March 28, 2018

As Tax Day 2018 approaches, it is worth exploring a pressing question that is widely misunderstood: do undocumented immigrants pay federal taxes?

The short answer is yes. Many undocumented immigrants find ways to legally pay both federal income and payroll taxes even if they don’t have a Social Security number (which is normally required) and even if their income was earned by working illegally.

As Tax Day 2018 approaches, it is worth exploring a pressing question that is widely misunderstood: do undocumented immigrants pay federal taxes? 

Why Would an Undocumented Immigrant Pay Taxes?

Though there are many undocumented immigrants who are paid “under the table” for their work and do not pay taxes on their income, many others do pay in the hope that it will someday help them become citizens. Much of the evidence for this motivation is anecdotal, but various attempts at comprehensive immigration reform legislation over the last decade, including the “Gang of Eight” bill S.744, have included provisions like “good moral character” and “paying back taxes” as requirements for obtaining legalization. A provable history of paying taxes is seen as one way to show good faith, should such a bill ever pass.

Can Non-Citizens Get Social Security Numbers?

Only certain non-citizens are eligible to receive a Social Security number. If an immigrant is authorized to work temporarily—whether through a work visa like an H1-B or a temporary work-authorized status such as Deferred Action for Childhood Arrivals (DACA) or Temporary Protected Status—a Social Security number is issued and remains valid for the length of the work authorization period. Green card holders, refugees, asylees, and certain other non-citizens who are allowed the live and work in the United States indefinitely are also eligible for a Social Security number with no restrictions. Undocumented immigrants are not eligible to obtain a Social Security number.

How can Undocumented Immigrants be Hired Without a Social Security Number?

Since the Immigration Reform and Control Act of 1986, all employers are required to verify the work eligibility of all new hires by completing Form I-9, which mandates the employee provide a Social Security number and show documents to their employer to prove work authorization and identity. U.S. citizens frequently show their driver’s license and Social Security card, but because there are a number of documents that can be used to complete the form, the worker does not necessarily need to show their actual Social Security card. Undocumented workers who are hired without valid work authorization may provide their employer a fake Social Security number, someone else’s number, or even a previously-valid number issued when they may have had work authorization that has since lapsed. Furthermore, most employers do not—and, except for certain employers,  are not required to—verify this information with any government entity at the time of hire. Additionally, employers cannot, by law, ask to see any specific or additional documents other than what the worker provides, so the Social Security number provided by an undocumented immigrant on their Form I-9 would be used by the employer to withhold payroll taxes and would be included on their W-2 form.

What Happens if an Undocumented Immigrant Uses a Fake or Someone Else’s Social Security Number?

The employer will withhold federal and payroll taxes as with any other employee and report that to the Social Security Administration (SSA) and the Internal Revenue Service (IRS). SSA notes when a name and number on a submitted W-2 do not match the Social Security records and may notify an employer, but it has no authority to enforce penalties. The IRS does have enforcement power, but it rarely investigates employers—even those with a high number of suspect W-2s—both as a matter of limited resources and because of the relative ease with which the employer can show it did its due diligence as required by the law to ask the employee for a corrected number. Further, since the penalty is only a $50 fine for each mismatch, it generally is not worth the government’s time to pursue it. Even if an employer is notified of a mismatch, under immigration law it is not considered proof that a worker is undocumented, so all the employer can do is ask the employee to correct their information. Taking any sort of action to terminate the worker could violate anti-discrimination law.

How do Undocumented Workers File Tax Returns Without a Valid Social Security Number?

Though certain non-citizens are eligible for to receive Social Security numbers to pay taxes, unauthorized immigrants are ineligible to receive one. However, it is still law that individuals who reside in the United States, whether legally or not, and earn income here must pay taxes on that income, and file a tax return, regardless of whether the income was earned as an undocumented worker—a complicated legal conundrum.

Further, the IRS will not allow a tax return to be filed with a fake or stolen Social Security number. Therefore, unauthorized workers who wish to file their taxes–and potentially get future credit for it— must find another way. Thus, many use the Individual Taxpayer Identification Number, or ITIN, which allows immigrants without Social Security numbers to legally file tax returns and claim the income reported on their W-2’s to the IRS.

What is an Individual Taxpayer Identification Number (ITIN)?

In 1996, the Internal Revenue Service created the ITIN to provide a way for noncitizens who earn income in the United States, including legally-present noncitizens who do not have Social Security numbers, to pay taxes on money earned in the United States while not being technically employed by a U.S employer. For example, ITINs allow foreign nationals to pay taxes on the interest earned in a U.S. bank or investment account. They also allow spouses of work-authorized visa-holders to pay taxes on self-employment income, among other uses.

Most experts believe that the vast majority of tax returns filed with ITINs today are filed by undocumented immigrants rather than the intended recipient groups—a few categories of noncitizens who do not have a Social Security number and are not authorized to work but who are still earning income and legally residing in the United States. In 2010, ITINs were used to file over 3 million federal tax returns.

How Does One Obtain an ITIN?

All that is required to obtain an ITIN is an application form that requires basic information such as one’s name, date of birth, and address, along with a filled-in federal income tax return, and proof of identity— not proof of work authorization or proof that you are in the United States legally. Those with Social Security numbers are not eligible to receive an ITIN. Once an undocumented immigrant has an ITIN, they are able to legally file tax returns.

Tax information on ITIN holders is legally protected under privacy laws and cannot be shared with the Department of Homeland Security or Immigration and Customs Enforcement, thus an undocumented worker can obtain one without fear of the information being used to find and deport them. While this disconnect is a source of ongoing tension between the agencies, sharing this information would require legislative action—either a new law or an amendment to the Immigration and Nationality Act.

How Much do Undocumented Workers Pay in Taxes?

The IRS estimates that undocumented immigrants pay over $9 billion in withheld payroll taxes annually. Undocumented immigrants also help make the Social Security system more solvent, as they pay into the system but are ineligible to collect benefits upon retiring. In 2010, $12 billion more was collected from Social Security payroll taxes of undocumented workers than were paid out in benefits.

Do Undocumented Immigrants Collect Benefits?  

Undocumented immigrants are eligible for very few federal benefits (Table 1). One notable tax benefit that they have traditionally been eligible for is the Child Tax Credit, a partially refundable credit designed to support low-income families based on their dependent children. A report from the Treasury Department estimated that undocumented immigrants received $4.2 billion in refundable child tax credits in 2010, or roughly one-eighth of the total paid.

However, last year’s tax law changed eligibility requirements by making the refundable portion of the child tax credit only available to filers whose dependents have valid Social Security numbers, therefore rendering ITIN filers with undocumented children unable to claim the CTC for those dependents.

Table 1: What Federal Benefits are Undocumented Immigrants Eligible For?

Tax Credits (Refundable)Ineligible for most tax credits; ITIN holders with U.S. children can receive the Child Tax Credit
Pell Grants & Student LoansIneligible
Unemployment InsuranceIneligible
Supplemental Security Income (SSI)Ineligible
Supplemental Nutrition Assistance Program (SNAP)Ineligible
Social SecurityIneligible
MedicaidEmergency service only
Health Care Premium and Cost-Sharing AssistanceIneligible
Children’s Health Insurance Program (CHIP)No federal care; some states cover for labor and delivery, prenatal, and postpartum care
Source: Congressional Budget Office and U.S. Department of Health and Human Services

Conclusion

At the heart of this issue of undocumented immigrants and taxes is the fact that U.S. immigration and taxation laws are misaligned. Agencies are singularly focused on their own mandates: the IRS is interested in maintaining a broad tax base and collecting all taxes owed to the government, regardless of the source, whereas immigration enforcement officials want to enforce the law against unauthorized work. Meanwhile, other actors within the system, including employers and workers, are doing the same. Addressing these conflicting interests would require legislative change and implicate millions of taxpayers, which means the current state of affairs will likely prevail for the foreseeable future.

KEYWORDS: DEFERRED ACTION FOR CHILDHOOD ARRIVALS (DACA), INCOME TAX FILING SEASON, INTERNAL REVENUE SERVICE, SOCIAL SECURITY ADMINISTRATION, TAX POLICY