November 29, 2014

What Are Sole Proprietors Spending On Payroll?

As you no doubt know, employee compensation is a nontrivial part of small business costs. But what you might not realize is how much that cost varies across industries.

Payroll

I have taken Internal Revenue Service (IRS) data on sole proprietorships from 2009, the latest year available, to create a chart of payroll expenditures as a percent of sales for the average sole proprietorship in different industries. (I dropped the industries with fewer than 50 tax returns filed because the numbers are too imprecise.)

You can download the chart, it’s an Excel spreadsheet titled, “Payroll As Percent Sales.”

While the IRS’s tendency to release data slowly makes using its numbers to look at trends over time a bit problematic, its figures are still good for making cross industry comparisons. Moreover, since the IRS data are based on tax filings rather than voluntary surveys, they are more comprehensive and more accurate than non-administrative types of data.

The chart may be useful to people for a variety of reasons I can’t anticipate. So it’s there for people to use, however they see fit.

But permit me to make three observations about it:

First, the fraction of revenues that the average non-farm sole proprietorship spends on payroll is pretty low, coming in at 8.7 percent. That may reflect the fact that relatively few sole proprietors have any employees.

Second, there’s a lot of difference across industries in what sole proprietors are spending on payroll, ranging from 0.6 percent of sales for investment bankers and securities dealers to 28 percent for surveying and mapping services.

Third, even in similar types of businesses, there is a surprising difference in payroll expenditures. For instance, the average sole proprietor in architectural services spends 17.6 percent of revenues on payroll versus 8.5 percent for the average sole proprietor in engineering services. Similarly, the average doctor’s office set up as a sole proprietorship spends 13.3 percent of receipts on payroll, while the average dentist’s office using the same legal form of organization spends 22.6 percent.

Payroll Photo via Shutterstock

3 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

3 Reactions

  1. Interesting stats, Scott. Thanks as always for sharing!

  2. Is there any way to track how many of these sole proprietors change their reported structure over time? Seems to me that a sole proprietor with a high percentage of revenue going into payroll would quickly change the organization type.

  3. Interesting. What was the sample size? I’m a little surprised that sole proprietorships are used – my assumption was that anyone with a going concern would form an LLC or S Corp, especially those with legal risk like dentists or architects. Do you have any thoughts as to why one would maintain a sole proprietorship?

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