The IRS Says Freelance Economy is on the Rise, the BLS Disagrees

The IRS Says Freelance Economy is on the Rise, the BLS Disagrees

Data from the Internal Revenue Service (IRS) reveal that self-employment is on the rise and has been growing since the late 1990s. The Bureau of Labor Statistics (BLS) figures indicate that self-employment has been flat over the same period.

The tax authority’s numbers show that the number of individual income tax returns that took the self-employment tax deduction rose by 35.2 percent, and that the number of tax returns that show either non-farm income or loss increased by 35.3 percent, between 1998 and 2013 (the most recent year for which data are available). That’s almost double the 18.4 percent increase in the number of individual tax returns filed over the same period.

The faster rate of increase in self-employment tax filings has led to a rise in fraction of American individual tax returns with self-employment income. IRS data show that this portion increased from 10.5 percent in 1998 to 12.5 percent in 2013.

These numbers are consistent with the rise in the freelance economy that many observers have been describing. New technology, the growth of the sharing economy, rising business preference for contingent workers, and shifting attitudes toward traditional work arrangements, have spurred a rise in the number of people choosing to work for themselves, observers have noted.

But the IRS figures don’t jibe with the numbers provided by the nation’s official tracker of the labor force, the Bureau of Labor Statistics. BLS data on self-employment shows that the number of people in business for themselves rose only 0.9 percent between 1998 and 2013. That’s a far smaller increase than the 9.5 percent bump in the number of employed workers.

When I looked at these trends before, I thought the differences between the numbers from the two government agencies might be the result of the tendency of the BLS to focus on respondents’ primary jobs, while the IRS looked at all sources of income. If part-time self-employment rose, while full-time self-employment remained flat, the IRS data would show an increase, whereas the CPS statistics would indicate no change.

Now I’m not so sure my first explanation was right. BLS data also show a decline in part-time self-employment over the past 15 years. From 1999 to 2013 the “number of multiple jobholders who are wage and salary on the main job and self-employed on the secondary job” declined 22.7 percent. That is, the labor department’s statistical agency shows no rise in primary self-employment and a sizeable decline in secondary self-employment over the same period that the tax authority reveals a sizeable increase in overall self-employment.

There’s another explanation that’s consistent with the data. Americans tendency to go to work for themselves hasn’t changed in the past 15 years, but their tendency to tell the tax collector that that they earned money working for themselves has increased. Americans might be more likely to report self-employment income because they are more willing to comply with tax laws, or because they know that the tax authorities are better able to identify self-employment income than they used to be, or because they are simply more afraid of being caught under-reporting income.

Freelancer Photo via Shutterstock

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.