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Pass-through Businesses Employ Most of the Private Sector Workforce

1 min readBy: Andrew Lundeen

In commemoration of National Small Business Week, we are covering some facts on U.S. businesses.

Most small businesses are pass-through businesses. A 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. is a type of business where the owner pay the 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. on his or her 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. return.

According to 2011 Census data, pass-through businesses employ 55.3 percent of the private sector work force of 119 million people. This represents approximately 65.8 million workers and business owners.

Employment by pass-through businesses varies by state. However, pass-through businesses employ most of the private sector workforce in 48 states. In eight states, pass-through businesses account for more than 60 percent of employment. Pass-through businesses employ 67.9 percent of the private work force in Montana, 64.7 percent in South Dakota, and 64 percent in Idaho.

Hawaii (48 percent) and Delaware (49.5 percent) are the only states where corporations employ more workers than pass-through businesses.

See here for the top tax rates paid by pass-through businesses. See our report for a more in depth look at pass-through businesses.