- Small Business Trends - http://smallbiztrends.com -
Higher Earners are more likely to be Self-Employed
Posted By Scott Shane On April 28, 2014 @ 8:00 am In Employment | 5 Comments
Statistics from the Internal Revenue Service (IRS) show that the tendency to be self-employed increases with income.
IRS data inform our understanding of self-employment because individual income tax filings reveal which taxpayers took the self-employment tax deduction, and which did not. Federal Insurance Contribution Act (FICA) taxes take 15.3 percent of workers’ pay to fund social security and Medicare, with half of these taxes paid by employers and half by employees. (In tax year 2013, high income earners have to pay an additional 0.9 percent Medicare tax). Self-employed people with net earnings – revenues less permitted business expenses – of at least $400 must pay both the employer and employee portions of these payroll taxes. However, those working for themselves are allowed to deduct the employer portion of these taxes from their income when filing their individual income taxes.
IRS tax statistics  reveal that 12.6 percent of individual filers took the self-employment tax deduction in 2011 (the most recent year data are available). Taxpayers with adjusted gross incomes of between $25,000 and $50,000 were the least likely to use the tax break – less than 10 percent of them took it.
As the figure below indicates, the share making use of the self-employment tax deduction rises rapidly with income. While only 11.7 percent of tax returns with an adjusted gross income of $100,000 or less made use of the tax break, 46.9 percent of returns with an adjusted gross income of $10 million or more took advantage of it. Moreover, the fraction of returns that included this deduction rises rapidly with income up to $1 million.
For measuring self-employment, IRS data offer an important advantage over other data sources. They are administrative data. Because taxpayers must file tax returns, IRS data are not subject to non-response bias present with employment surveys, such as those administered by the Bureau of Labor Statistics (BLS) and the Census Bureau.
On the other hand, the IRS data don’t measure self-employment per se, but rather the use of the self-employment tax deduction. Some self-employed taxpayers might not take this tax deduction. Moreover, the deduction is for earnings that the tax authority considers self-employment earnings, some of which isn’t what most of us think of as self-employment income.
Nevertheless, IRS data on the use of the self-employment tax deduction is at least as good a measure of self-employment as that provided by other federal agencies. Even with possible biases, the tax authority’s numbers show clearly that more high income taxpayers have self-employment income than low income filers.
Article printed from Small Business Trends: http://smallbiztrends.com
URL to article: http://smallbiztrends.com/2014/04/higher-earners-likely-self-employed.html
URLs in this post:
 IRS tax statistics: http://www.irs.gov/uac/Tax-Stats-2