Rise In Self-Employed Challenges The Common Wisdom

Andrew W. Hait

If you think a business is a brick-and-mortar place of work with employees and managers who have benefits and paid time off, think again.

The latest data show that more than three-fourths of U.S. businesses may be run out of someone’s home and have zero employees.

The rise in the number of self-employed has altered what people believe a business is.

The U.S. Census Bureau has released a report that combines the data published on employer businesses with data on businesses without paid employees, or “Nonemployers.” This report challenges the common wisdom of just what is a business, how important are each of these two types of businesses, and how this definition and importance has changed.

How Businesses Have Changed

Traditionally, businesses are brick-and-mortar enterprises that have paid employees. They have staff who manage these employees and often provide benefits for them, including employer-sponsored health care and paid time off. They pay unemployment insurance taxes for their workers.

They are the nearly 7.8 million establishments covered by the County Business Patterns program. In 2016, these businesses employed almost 127 million people, and reported just over $6.4 trillion in annual payroll, or about $50,769 per employee.

But what about self-employed people? How prevalent are they, and how important are they to our local economy?

According to the Nonemployer Statistics program, there were almost 25 million nonemployer businesses in 2016, accounting for more than 76.2 percent of all businesses.

These are businesses with no paid employees and are subject to federal income tax. Most nonemployers are self-employed individuals operating sole proprietorships, which may or may not be the owner’s principle source of income.

They are present in nearly every sector of the U.S. economy, and are especially dominant in some industries.

For example, the 1.1 million nonemployer real estate leasing businesses account for 90.2 percent of the total number of businesses in this industry.

The number of self-employed businesses is also growing at a faster rate than their employer counterparts.

Between 2012 and 2016, their numbers increased by more than 2 million, a 9.1 percent increase. In the same period, the number of employer businesses increased by 4.4 percent.

The share of all businesses made up by these nonemployers also increased slightly, from 75.4 percent to 76.2 percent.

It’s important that the Census Bureau collects these data for both business types to recognize the value of both.

“States have difficulty measuring their nonemployer economy because they don’t pay into unemployment insurance,” said Ron Jarmin, deputy director and chief operating officer of the Census Bureau. “The Census Bureau’s nonemployer measurements provide states with valuable information on this critical part of the economy.”

The Self-Employed Can Earn More

If we assume that each of these nonemployer businesses has one person “employed” in the business, we can compare the share of the workers in an industry who work for employers compared to those who are self-employed.

For example, employer beauty salons had 435,796 employees in 2016 but there were 730,782 self-employed people in this industry — 62.6 percent of the total number who work in this industry.

If we compare the annual payroll per employee of the employer businesses to the revenue per nonemployer business, we see that these self-employed persons earn significantly more than employer workers.

For example, the nation’s 160,823 nonemployer doctor’s offices generated nearly $15.1 billion in revenue in 2016, or an average of $93,867 per business. The 2.5 million employees of employer doctor’s offices earned an average annual payroll of $87,198 in 2016.

It’s important to note that the revenue of nonemployers excludes an adjustment that would need to be made for expenses, and that the average payroll of employer doctor’s office includes workers other than just physicians, but this comparison is still interesting.

What’s the Impact on Workers and Local Economies?

First, with technological advances across the nation, workers now have the capacity to utilize their skills to work as independent contractors.

These businesses can operate closer to their customers and the workers can minimize their costs by working out of their homes. Local economic development officials can not only look to getting that big employer business to move to their community but also to leverage the skills of their workforce via nonemployers.

Second, while it is likely that these nonemployer businesses do not offer the benefits that employers do, the average revenue of many of these businesses helps offset the difference. Also, these benefits often aren’t necessary if their spouse or partner has a job that provides benefits.

Finally, as industries strive to maximize their profits and operate as efficiently as possible, utilizing the unique benefits of self-employment is becoming increasingly important. Employers will continue to dominate some business types but nonemployers will continue to grow in others.

Comprehensive data on employer and nonemployer businesses are available in American FactFinder (AFF), the Census Bureau’s online database tool. AFF provides full access to all of the data from County Business Patterns and Nonemployer Statistics.

The Census Business Builder data tool allows users to view key data from these two business types together to understand the share of these businesses by industry.

This data is only possible because businesses took the time to complete the various economic surveys and programs the Census Bureau conducts.

Source: U.S. Census Bureau-Andrew W. Hait is a survey statistician/economist at the Census Bureau.