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More than Half of all Private Sector Workers are Employed by Pass-through Businesses

1 min readBy: Kyle Pomerleau

This week's taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. map comes from a report we released this morning and takes a look at the amount of private sector employment that comes from pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. es.

Sole proprietorships, S corporations, limited liability companies (LLCs), and partnerships are also known as pass-through businesses. These entities are called pass-throughs, because the profits of these firms are passed directly through the business to the owners and are taxed on the owners’ individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. returns.

This is in contrast with traditional C corporations, which pay tax at the entity level through the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. . Their owners (shareholders) then pay tax on this income again when they receive a dividend or sell their stock and realize a capital gain.

Today, Pass-through businesses pay a significant role in the United States Economy. They account for 95 percent of all businesses and more than 60 percent of all business income.

Even more, pass-through businesses account for 55.2 percent of all private sector employment. This represents 65.7 million workers who are employed at or self-employed as pass-through businesses.

The prevalence of pass-through employment varies among U.S. states. According to 2011 Census Bureau data, pass-through businesses accounted more than 60 percent of business employment in eight states: Idaho (64 percent), Maine (62.4 percent), Montana (67.9 percent), North Dakota (60.5 percent), Rhode Island (60.6 percent), South Dakota (64.7 percent), Vermont (63.1 percent), and Wyoming (61.8 percent).

In contrast, Delaware (49.5 percent) and Hawaii (48 percent) had pass-through employment as a share of total private sector employment of less than 50 percent.

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Read more about pass-through businesses here.