In the past three decades, the importance of “pass-through” businesses has grown substantially. The combined net income of sole proprietors, LLCs, Partnerships, and S corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT). s has increased fivefold and now accounts for more than 50 percent of all business income. C corporations now earn less than half of all business income.
Another way to look at how 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 have increased in importance is their role as employers. Not only do they account for more than 50 percent of net business income in the United States, they account for more than 50 percent of employment too.
According to 2012 census data, 54.8 percent of all business employment (employment excluding non-profits and governments) is pass-through business employment. This represents approximately 66.6 million workers and sole proprietors. C corporations comprise the remaining 45 percent, or 54.9 million workers.
The importance of pass-through business employment varies by state. In some states such as Delaware (48.5 percent) and Hawaii (47.3 percent) pass-through businesses accounted for less than 50 percent of business employment. In contrast, states such as Idaho (62.9 percent), Maine (61.7 percent), Montana (66.9 percent), South Dakota (64 percent), and Vermont (60.1 percent) had pass-through employment as a share of total business employment of greater than 60 percent.
Due to the fact that these businesses pay 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. es through the 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. code, it is important to understand their economic impact and how changing the individual tax code could influence these employers.
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