Tax Planning

Undocumented immigrants pay taxes too. Here's how they do it.

Alexia Fernández Campbell
WATCH LIVE
Luke Sharrett | Bloomberg | Getty Images

A 36-year-old woman was working on her taxes with a tax preparer Friday morning when a green box popped up on the computer screen: "Taxpayer's Social Security number is not valid."

This wasn't a surprise. The woman was an undocumented housekeeper from El Salvador who had come to file her tax returns at Casa de Maryland, which hosts two federally subsidized tax centers that help low-income workers file their taxes for free.

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So far this year, the group has helped 198 unauthorized immigrants file their taxes. While the woman and her tax preparer, Earvin Gonzalez, worked, about a dozen immigrants clutched folders full of receipts and tax paperwork and waited patiently in line for their turn.

Unauthorized workers aren't eligible for benefits like the earned income tax credit — which is what the green box on the screen was warning Gonzalez about. Nor can they get Social Security or Medicare. But the IRS still wants unauthorized immigrants to file their taxes, and many of them do. The best estimates from the Institute on Taxation and Economic Policy, a Washington, DC, think tank, suggest about half of undocumented workers in the United States pay income taxes.

Filing taxes helps immigrants create a paper trail to show when they entered the country and how long they've been contributing tax dollars. Many are hoping it will help them get legal status one day. That has happened in past reform efforts, and one of the first requirements is usually to prove that a person has been paying taxes. That was the case for the undocumented youth granted temporary work permits under President Obama's deportation-relief program, known as DACA. With the new administration's fixation on a border wall, however, their chance of getting papers is more remote than ever.

How unauthorized immigrants pay their taxes

Maria, whose name is being withheld because of her immigration status, handed a folder with tax documents from two jobs to Gonzalez. Her W-2 showed that a housecleaning company paid her $17,288 last year.

The Social Security number on the W-2 form is made up, Maria tells me, because she doesn't have one. Her employer never asked for identification to verify it, she says. Instead, she has an Individual Taxpayer Identification Number (ITIN), created by the IRS in 1996 so people who aren't allowed to work in the United States could still file taxes on any money they earned. (The IRS does not share ITIN information with immigration authorities.)

The agency doesn't break down the number of tax returns filed this way, but in 2010, it reported that about 3 million ITIN holders paid more than $870 million in income taxes. There are currently about 12 million unauthorized immigrants living in the United States, including children and the elderly.

Maria said she applied for an ITIN number shortly after arriving illegally in the United States from El Salvador in 2009. People told her that having a record of paying taxes would help her adjust her status if immigration reform happened and she was given a path to citizenship.

Comprehensive immigration reform failed in Congress, but Maria is still paying her taxes every year. "I think it's important, and all my relatives pay their taxes too," she said.

This year, her documents included two 1099 forms, for work Maria did as a contractor.

"What kind of jobs were these?" Gonzalez asks her in Spanish.

"After cleaning houses, I would go lay concrete in parking lots," she says.

Those two jobs brought in a total of $24,845 last year, and Maria still needed to pay taxes on that income. Gonzalez entered some deductions, such as the $1,500 she spent on equipment to pour and level concrete and the 12,000 miles she drove between job sites. Maria, who is a single mom, claimed two dependents: her 16-year-old son and 13-year-old daughter. With her ITIN number, she was able to claim child tax credits, but not the earned income tax credit, the major federal tax credit for low-income working families.

In the end, Maria owed $1,131 in income taxes to the state of Maryland and $775 to the federal government. She said she had some money saved up, because she knew she would have a tax bill at the end of the year from the contracting jobs. But she said she will probably get on a payment plan with the IRS. If Maria had qualified for the earned income tax credit, her tax bill would probably have been about $500 lower.

How unauthorized immigrants end up helping Social Security

It's true that not all undocumented immigrants pay federal income taxes, because the government has no way to keep track of their under-the-table earnings. The IRS can withhold taxes from those hired with fake Social Security numbers, but workers who get paid in cash could simply choose not to report it, unless they voluntarily file a return with an ITIN number.

Still, all undocumented workers fund public schools and local government services by paying sales and property taxes like everyone else. In 2010, that added up to about $10.6 billion in state and local taxes, according to an analysis by the Institute on Taxation and Economic Policy.

And workers who get a paycheck, like Maria, still have payroll taxes for Medicare and Social Security withheld from their paycheck, even if they put a fake Social Security number down on their W-2 form. The IRS estimates that unauthorized workers pay about $9 billion in payroll taxes annually.

In Maria's case, the W-2 form showed that she paid $1,072 into Social Security and $251 into Medicare, two social safety net programs she will never benefit from.

A portion of the tax goes to the retirement trust fund at the Social Security Administration. In 2013, the agency reviewed how much money undocumented workers contributed the retirement trust fund. The number was astonishing: $13 billion in one year.

The chief actuary of the Social Security Administration, Stephen Goss, estimates that about 1.8 million immigrants were working with fake or stolen Social Security cards in 2010, and he expects that number to reach 3.4 million by 2040.

So many unauthorized immigrants were paying into the trust fund while getting nothing in return that it ends up generating a lot of revenue for the government. "We estimate that earnings by unauthorized immigrants result in a net positive effect on Social Security financial status generally," Gross concluded in the 2013 review.

These numbers are a stark contrast to the often repeated rhetoric that undocumented immigrants are a drain on the US. economy. Even most Americans seem to think so — in a 2014 Reuters poll, 63 percent of people surveyed said they believe undocumented immigrants burdened the economy. During Trump's first address to Congress, he said immigration cost US taxpayers billions of dollars a year.

Emiliano, a 57-year-old undocumented day laborer from Honduras, says he knows many people assume he doesn't pay his taxes. He doesn't care. He just hopes one day it will help him get legal status.

When I told him the chances don't look good under the Trump administration, he shrugged.

"You have to have hope in something," he said.