Most of the Private Sector Workforce is Employed by Pass-through Businesses

by Kyle Pomerleau, The Tax Foundation, October 29, 2014

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 corporations 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 businesses 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 taxes through the individual income tax code, it is important to understand their economic impact and how changing the individual tax code could influence these employers.

(Click map to enlarge)