Most Private Sector Workers Employed in Pass-Through Companies
November 3, 2014
C-corporations -- what people think of as traditional corporations which pay the standard corporate income tax -- are no longer responsible for most business income. Instead, sole proprietors, limited liability companies (LLCs), partnerships and S-corporations now make up more than 50 percent of all business income, says Kyle Pomerleau of the Tax Foundation.
These business are known as "pass-through" businesses, meaning that their income "passes through" to the owners of the business, who pay individual income tax on the company's earnings. Corporations, on the other hand, pay income taxes directly, as an entity. Pass-through corporations are growing in importance:
- As of 2012, 54.8 percent of business employment was in pass-through businesses. That's 66.6 million workers.
- The rest of the private sector force is employed by C-corporations -- 54.9 million employees.
- In some states, the number of pass-through entities is even higher. In Montana, 66.9 percent of business employment is in pass-through businesses, while 47.4 percent of Hawaiian employment is in pass-through businesses.
What is significant about the growing number of pass-through entities, says Pomerleau, is that these businesses pay the individual income tax, not the corporate income tax. Raising taxes on individuals, therefore, does not just affect individuals, but the many businesses -- and ultimately their employees -- who pay the individual income tax.
Source: Kyle Pomerleau, "Most of the Private Sector Workforce is Employed by Pass-through Businesses," Tax Foundation, October 29, 2014.
Browse more articles on Tax and Spending Issues