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

by Kyle Pomerleau, Richard Borean, The Tax Foundation, January 22, 2015

This week's tax 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 businesses.

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 tax returns.

This is in contrast with traditional C corporations, which pay tax at the entity level through the corporate 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.

Click on map to enlarge.

Read more about pass-through businesses here.