Employers and people in general often underestimate the contributions of undocumented workers. A report by the Institute on Taxation and Economic Policy (ITEP) revealed that undocumented immigrants contribute approximately $11.6 billion annually in US state and local taxes. This amounts to 8% of their earnings towards taxes on average.
The research suggests that half of the 11 million undocumented immigrants1 in the United States file their income taxes with an Individual Tax Identification Number (ITIN). And those who do not file may have it taken from their paychecks automatically.
All this means undocumented immigrants pay the same taxes as everyone else living and working in the USA. In fact, giving this group legal status could increase tax contributions by $2.1 billion1, and the national tax rate would rise by 9%1.
It’s no wonder immigration reform remains a hot topic.
Now that you can confidently answer the question, do illegal immigrants pay taxes? Let’s go a little deeper, starting with some pros and cons.
Undocumented workers face the dilemma of whether to pay federal taxes. It’s just a counterintuitive thing to do for those without legal status to engage with federal systems. Yet, many actively contribute to the tax base.
The decision to pay taxes as an undocumented immigrant is influenced by various factors, both advantageous and detrimental.
Here’s a breakdown of all tax-related benefits and how they apply to undocumented immigrants.
|Children’s Health Insurance Program (CHIP)||No federal care. However, some states cover labor and delivery, prenatal, and postpartum.|
|Health Care Premium and Cost-Sharing Assistance||Not eligible|
|Medicaid||Emergency services are covered|
|Tax Credits (Refundable)||Ineligible for most credits. Holders of an ITIN with US children can get the Child Tax Credit|
|Pell Grants & Student Loans||Not eligible|
|Unemployment Insurance||Not eligible|
|Supplemental Security Income (SSI)||Not eligible|
|Social Security||Not eligible|
|Supplemental Nutrition Assistance Program (SNAP)||Not eligible|
For many unfamiliar with immigration nuances, the question often arises: how do illegal immigrants pay taxes without an SSN?
Well… they do this through a tax identification number, which is mandatory for paying taxes, and the most common one is an SSN. While some groups of immigrants do qualify for it, undocumented workers do not.
The groups of immigrants that qualify for an SSN are as follows.
For undocumented workers, the US tax system provides the ITIN as an alternative mechanism. Let’s go over it in greater detail.
The ITIN is a crucial tool for undocumented immigrants to comply with US tax laws. The Internal Revenue Service (IRS) created it in 1996 to ensure non-citizens pay taxes on earned income, including those without an SSN.
This extends not just to those working illegally but also to foreign nationals needing to pay taxes on interests from US banks or investment accounts. It also covers spouses of work-authorized visa holders paying taxes on self-employment income, among other scenarios.
To obtain an ITIN, non-citizens and immigrants must complete an application form, filling out basic details such as name, date of birth, and address. They must also provide a filled-in federal income tax return and proof of identity. However, the application doesn't require proof of work authorization or legal residency.
But bear in mind that it doesn’t legally authorize someone to work in the US either. For that, an official work permit is necessary, which has its own application process.
In addition, workers can use ITIN numbers for other purposes legally. For example, it may help undocumented immigrants establish their identity to apply for a credit card, bank account, business loan, or mortgage.
A common concern among undocumented immigrants is whether using an ITIN to file taxes might inadvertently draw the attention of immigration enforcement agencies.
However, there are privacy laws in place that offer robust protection to ITIN holders. Specifically, current laws dictate that the tax information of individuals who file using an ITIN is kept confidential.
That means agencies like the IRS cannot share this data with the Department of Homeland Security or Immigration and Customs Enforcement.
There’s also a clear separation between departments. In particular, the following.
The federal government's immigration agency
The US Department of Homeland Security
The Immigration and Customs Enforcement or ICE
The government's tax agency
This protective measure is intentional.
The country must encourage all individuals, regardless of immigration status, to fulfill their tax obligations. People just won’t file if they are afraid of repercussions. So, to a great extent, undocumented workers can confidently use an ITIN to file their taxes.
However, there are no guarantees. Unauthorized immigrants may face immigration consequences if the laws on tax filing ever change. For now, though, the US's immigration and tax laws have differing goals.
From the IRS' perspective, it doesn’t matter if someone filling is legally working or not. Their purpose is to collect taxes and encourage people to continue filing. On the other hand, the ICE's mandate is to deport undocumented immigrants from the United States.
With the current laws, neither department shares information with the other. Legislative change would be required to address the conflicting interests, implicating millions of taxpayers. As a result, the current state of affairs will likely prevail or remain the same for a long time.
Filing taxes as an undocumented immigrant can be a daunting task, especially when you are new to the country. Here are the steps to follow.
1. Determine tax filing requirement
Before proceeding, determine if you need to file a tax return3 — usually based on your income, filing status, and age. For example, single people under 65 must file if their income is at least $12,950, while for those older in the same circumstance, the requirement is $14,700.
2. Obtain an ITIN
If you don't have an SSN, you'll need an ITIN to file your taxes.
3. Prepare your tax return
Using your ITIN, complete the relevant tax form. For most individuals, this will be Form 1040, a US Individual Income Tax Return5.
4. Mail your tax return
Once your tax return is complete, mail it to the IRS. If you obtained an ITIN for the first time, you should mail your tax return along with Form W-74.
5. Keep records
Always keep a copy of your filed tax return and any related documents. This can be crucial for future reference, especially if there's a need to provide a history of tax payments.
6. Monitor refund status (if applicable)
If you're expecting a tax refund, you can monitor its status using the IRS's "Where's My Refund?" tool6. You’ll need to provide your taxpayer ID number, filing status, and the exact return refund amount.
7. Stay updated on tax laws
Tax laws and regulations can change. Stay informed to ensure you're complying with current laws and benefiting from any available credits or deductions.
Using a fake SSN can have serious implications for undocumented immigrants and employers alike. Here are some considerations.
When an undocumented immigrant provides a fake SSN to their employer, the employer typically treats it as legitimate for payroll purposes. Federal and payroll taxes are withheld from the employee's wages and reported to the Social Security Administration (SSA) and the IRS. This may lead to conflict that causes further investigation.
Discrepancies can arise when names and numbers on the submitted W-2 forms don't match the official Social Security records. Upon identifying such mismatches, the SSA might send notifications to the employer. However, while the SSA can inform employers of discrepancies, they don't possess the authority to enact penalties based on these mismatches.
The IRS has the authority to enforce penalties but often refrains from investigating employers, even those with numerous suspicious W-2s. This restraint is probably due to limited resources and the straightforward nature of how employers can prove their due diligence.
Not to mention, the current penalty is merely a $50 fine per mismatch. That makes aggressive enforcement often economically impractical.
Upon receiving mismatch notifications, employers typically have few options for response actions.
Of course, they can request that the employee correct the provided information. However, they can't terminate or take punitive actions based solely on the mismatch. Doing that could be a breach of anti-discrimination laws.
The act of using a fake SSN is fraught with legal challenges. For one, such an act is fraudulent, which comes with substantial legal penalties. Individuals caught breaking the law in this regard can face deportation proceedings and criminal charges.
Further, authorities can charge the person for identity theft if the crime relates to a legitimate SSN holder. That’s why many immigrants resort to using fake SSNs.
It's essential to be aware of the broader implications, both in terms of legal repercussions and potential harm to innocent parties. Plus, fraudulent situations can complicate and obstruct someone’s possible path to legal residency or citizenship.
Undocumented immigrants who contribute to the Social Security system with a fake SSN face another unique problem. While their contributions bolster the system, they can't claim any benefits upon retirement.
In other words, their contributions serve the system without offering them direct advantages. Some people view the situation as unjust, which is another reason immigration reform remains a top priority.
The tax contributions of undocumented immigrants are significant. However, the numbers could increase if US lawmakers champion a pathway to citizenship at the federal level.
Put another way, full citizenship may increase the tax contributions of currently undocumented immigrants by a substantial amount — funneling billions more annually into the nation's economy. This increased revenue would directly support crucial sectors like public education, health care, social services, infrastructure, and much more.
Additionally, on the state spectrum, legislatures can fortify their economies by endorsing policies that yield expansive economic benefits. For example, supporting immigrant entrepreneurs and rolling out programs and strategies to amplify their economic roles can substantially uplift state economies.
Furthermore, states could pass more inclusive policies to leverage immigrant contributions better. Examples include issuing driver's licenses irrespective of immigration status, facilitating commuting to work, and widening access to tax credits that incentivize employment.
Such initiatives may create a more inclusive and prosperous environment for all residents.
People often perceive undocumented immigrants as individuals without any legal rights. However, there are certain protections under the US legal system that individuals can leverage. Knowing how to access these rights is crucial.
Here's an overview of some key legal resources available.
Despite immigration status, undocumented immigrants have fundamental constitutional rights.
The 14th Amendment guarantees equal protection under the law, ensuring all persons, regardless of status, are treated equally by the legal system. This protection extends to critical areas like due process rights, including the right to a fair trial.
Asylum can be a lifeline for those who fear persecution in their home country based on race, religion, nationality, political opinion, or membership in a particular social group.
Asylum seekers must provide substantial evidence of their fear of persecution. They must also apply within one year of arriving in the US.
Every undocumented immigrant has the right to defend themselves against deportation. They can challenge the government's case, seek relief from removal, or ask for voluntary departure. Having legal representation can substantially increase the likelihood of a successful defense.
Certain undocumented immigrants might qualify for work authorization, allowing them to work in the US legally. The eligibility criteria may include factors like having a pending asylum application or being a beneficiary of specific visa categories.
As noted earlier, having a competent attorney can significantly impact an undocumented immigrant's ability to navigate the legal system. And while not provided by the government, community organizations and non-profits often offer free or low-cost legal services.
As you know by now, the intricacies of tax policies and their implications for undocumented immigrants are multifaceted. Many questions arise when navigating it all. Here are frequently asked questions addressing common concerns.
Undocumented workers can apply when they file their federal taxes. In other words, the individual can get an ITIN and file taxes simultaneously. This means filing Form W-7 with the federal income tax return.
Federal taxes are usually due on April 15th of every year in the USA. And even if the person didn’t earn enough money, filing a return is still recommended by the IRS.
Even though deportation changes a person's residence status, it doesn't necessarily absolve them of their tax obligations. This is especially true if they had earnings in the country during the taxation year.
However, each situation varies, so it's crucial to seek advice from a qualified attorney. Also, remember that the IRS can’t share someone’s immigration status with other agencies.
Yes, both green card holders (permanent residents) and non-immigrant visa holders have tax obligations in the US. However, green card holders are taxed similarly to citizens. Non-immigrant visa holders must adhere to specific guidelines.
To be taxable, this group must stay in the US for at least 31 days, factoring only the current year7. Or a total of 183 days over three years, following certain criteria.
Not always. Only those working or with income sources within the US are subject to taxation. Furthermore, if these individuals own property or operate a business within US borders, they may also be liable for various state and local taxes.
Income derived from international sources often requires reporting on a US tax return. Additionally, there are potential tax deductions or credits related to such foreign earnings. Given the intricacies of cross-border tax regulations, consider seeking advice from a tax expert when dealing with earnings from another country while residing within borders.
This article is provided for general information purposes only and is not intended to address every aspect of the matters discussed herein. The information in this article is not intended as specific personal advice. The information in this article does not constitute legal, tax, regulatory or other professional advice from IDT Payment Services, Inc. and its affiliates (collectively, “IDT”), and should not be taken or used as such by any individual. IDT makes no representation, warranty or guaranty, whether express or implied, that the content in this article is current, accurate, or complete. You should obtain professional or other substantive advice before taking, or refraining from, any action on the basis of the information in this article.