Tax & Business Insights

Immigrant Workers: An Overview

Volume 20 Issue 5 --  September/October 2008

In recent years, government raids on meatpacking plants with illegal immigrant workers have received much news coverage, but meatpacking plants are not the only businesses that must deal with this problem. Any business with undocumented workers faces potential problems on a number of different fronts.

A business that has a worker (employee or independent contractor) who has an invalid or suspect Social Security Number (SSN), may be forced to deal with at least four different federal agencies: (1) Internal Revenue Service (IRS), (2) Social Security Administration (SSA), (3) Department of Homeland Security (DHS), and (4) Department of Justice (DOJ). What’s more, the business's problems with each agency may be quite different.

Employers make Social Security payments on behalf of their employees, while independent contractors (IKs) are required to pay self-employment tax act (SECA) taxes which cover their social security payments. Whether a worker is an employee or an IK, he or she is part of the Social Security system.

The SSA maintains a master list of valid SSNs and their associated names. When it receives Social Security payments on behalf of workers whose names or SSNs do not match the agency’s records, it may send an employer a “no-match” letter. Such a letter effectively requires certain actions by the recipient to address the problem. It can also lead to enforcement action by either the DHS often through its Immigration and Customs Enforcement (ICE) division or by the DOJ, if a criminal prosecution is deemed to be warranted.

The IRS apparently maintains its own list of valid SSNs and Individual Taxpayer Identification Numbers (ITINs). When it receives W-2s or 1099s reporting payments to persons whose names or tax ID numbers do not match its list, the IRS may send out its own version of a “no-match” letter.

Although both SSA and IRS no-match letters may appear to be similar in substance, the practical consequences can be very different. Moreover, the actions required by a taxpayer in response to an IRS no-match letter are quite different from those required by an SSA no-match letter.

Most commonly, a business receives a no-match letter from the SSA (or DHS) with respect to W-2 employees who have incorrect, invalid, or suspect SSNs. Often, the IRS will send its no-match letter with respect to businesses paying IKs and reporting the payments on 1099s.

In this series of newsletters, the term “payor” is used rather than “employer” because many of these workers are treated as independent contractors and receive 1099s rather than W-2s. To illustrate the problems that a business can face, we will refer to “Kon Fused,” or “Kon,” who is the payor, while the service provider and payee will be “Jose.”

When a payor receives an SSA or DHS no-match letter, the payor is supposed to take certain steps within certain time periods in order to avoid being deemed to have willfully hired illegal immigrants. The steps to be taken and the time periods within which to do so lead to confusion, particularly among small employers that do not have a human resources department.

If Kon has a completed I-9 from Jose and the SSN is valid, then there may not be a problem with Jose.  But what if there is a problem and Kon Fused ignores the status of Jose and other workers?

There can be both civil (monetary) and criminal penalties for hiring illegal workers or workers without proper documentation. Although no assurance can be given to this effect, it appears that the DHS and DOJ tend to bring criminal cases only against large employers, but this is entirely within the discretion of the DHS and DOJ.

Even in the absence of a criminal prosecution, Kon Fused could face monetary fines and penalties for failing to have or file complete, accurate, or timely I-9s for its employees. Kon could end up facing the question of whether to terminate Jose if he cannot provide a valid SSN.

Recently, a number of states have attempted to undertake separate enforcement of the federal immigration laws, adding further confusion to the situation. Although somewhat controversial, in some cases the states attempt to enforce the federal law, while in other situations they impose heightened obligations on employers.

In the next issue ("Immigrant Workers and the IRS") we will look at some of the tax aspects of the immigrant worker problem.

If you have a client in a “no-match” situation and desire assistance, please give The Tax and Business Professionals a call. There is also more information on this subject elsewhere on our website.

Copyright 2008
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