Beyond the Immigrant Debate: Some Native-Born Citizens Don't Pay Taxes

Self-employed workers who do not pay into social security are taking a risk.

Most people are familiar with the immigrant debate. Do they pay for themselves in taxes and otherwise or not? Whatever the answer, there is another issue that is less in the news—our own native-born residents who do not pay taxes.

This is a true story. A 49-year-old woman born in Indiana who also works in the state said to me, “I haven’t paid into social security for 22 years.” To which, I thought to myself, “Isn’t that illegal?”

Well, yes it is. And, it made me wonder how many other of our native-born Americans are doing the same thing.

Here is at least a partial answer. In 2010 Stephen F. Hippie wrote a paper entitled “Self-employment in the United States,” published in The Monthly Labor Review, (September 2010, pages 17-32). He uses 2009 data based on a then-current population survey of the unincorporated and incorporated self-employed. About 1 in 9 workers in the United States were in that self-employed category according to Hippie.

Today, there are at least as many who are self-employed. That is over 15 million individuals, of whom approximately two-thirds are unincorporated. More than 87% were white in Hippie’s study and 84-85% were US-born. Among this number, many did not pay into social security much less pay taxes.

And, there is good reason. Though an employee at a corporation pays 7.515% for social security and Medicare taxes (and her employer matches it), the self-employed pay 15.4 percent. The government’s logic is that they are paying for two, themselves as employers and also as employees. According to a Huffington Post Small Business Blog by Nancy K. Humphreys, this pushes the self-employed into what she calls “the IRS deductions trap.” By this, she means employees take as many deductions as they can so that their income is low—below the radar for paying into social security. According to my research, this is under $400 for 2015.

This tactic, of course, is easy for the self-employed who work in the cash economy. Their income can’t be traced. While they and other self-employed individuals who do not pay into social security may think they are saving money, in reality they are risking their future. This is because not paying now means lack of social security benefits later. This type of short-term thinking is called “temporal discounting,” which is the human tendency to choose immediate rewards (keep the money now) rather than delaying them into the future (paying now for a gain later).

Sadly, in the case of social security benefits, these individuals may be destitute in their old age. If they then have to receive government aid, we taxpayers foot the bill. So, not only are they affected but we are too.

The Benefits of Paying into Social Security for the Self Employed

Not only does social security provide retirements benefits. It also makes disability assistance available if needed. Additionally, it provides a safety net to families if the breadwinner is no longer able to work or dies.

The Benefits to Tax Payers when the Self Employed Pay into Social Security

The argument is the same as the thesis of my earlier column, “The 401(k) Scoop: Care Now or Pay Later.” If retirees don’t have enough in their old age to support themselves, the US safety net will have to do so. That means taxpayers which translates into us.

The Solution

It is likely the government would have to intervene and make it more appealing for the self-employed to pay their social security taxes. This might be in the form of paying equivalent to what other employees pay (who are not self-employed) or decreasing the deductions self-employed individuals can take. In addition, and especially for the cash economy self-employed, education emphasizing the positive benefits of payment would be important.

As for the rest of us, through supporting payment of social security by the self-employed, we have a greater chance of being able to keep more of our money later. This is because we are less likely to have to provide cover a shortfall. In a nutshell, payment to social security by the self-employed not only helps them but us as well.