Using the Exact Match File for Estimates and Characteristics of Persons Reporting and Not Reporting Social Security Self-Employment Earnings

A congressional subcommittee requested that GAO determine the extent to which individuals may not be paying their social security taxes. The purpose of the request was to determine the size of the social security underground economy and the characteristics of individuals who did not pay their social security taxes. To address these issues, GAO used the Social Security Administration's (SSA) Exact Match File, which was developed to learn more about income distribution and redistribution in the United States. This File combines data from the 1973 Current Population Survey, 1972 SSA earnings and benefit records, and certain limited tax data from 1972 Federal income tax returns. Although the File shows detailed information for those who had self-employment earnings to enable a determination to be made about whether such employment is covered by social security, it does not indicate whether a worker's employment was covered by social security.

Using data obtained from the Exact Match File, GAO found that: (1) nonreporting of self-employment earnings in 1973 and 1976 accounted for about 55 percent of the dollar tax effect; (2) during the same period, underreporting accounted for about 40 percent of the dollar tax effect, and overreporting about 5 percent; (3) about 8 million self-employed persons reported self-employment earnings in 1972 to either SSA or the Internal Revenue Service (IRS) and paid about $2.5 billion in social security self-employment taxes; (4) an estimated 1.5 million self-employed individuals did not report any of their self-employment earnings to either agency; (5) of the estimated 1.5 million self-employed who did not report their self-employment earnings, about half filed a Federal income tax return; (6) 26.6 percent of those self-employed persons considered to have reported to either agency did not report any self-employment earnings during the Current Population Survey; and (7) there was no way to determine whether that which was recorded in the Current Population Survey as self-employment earnings was consistent with what IRS considers to be self-employment earnings. Thus, the estimates have considerable limitations, and care should be exercised in drawing conclusions from them.