Self-Employed Individuals Are an Important Segment of the U.S. Economy

“Self-employment continues to be an important source of jobs in the United States, according to Steven F. Hipple, an economist with the Bureau of Labor Statistics (“BLS”). In an article he published in the September 2010 issue of the Monthly Labor Review, titled “Self-employment in the United States,” Hipple explains that BLS data indicate that in 2009 there were 15.3 million self-employed individuals. While that figure includes both the unincorporated and incorporated self-employed, nearly two-thirds were unincorporated, according to the article. Overall, the self-employed in 2009 represented 10.9% of total employment.

The article reports that BLSA data indicate that, from 2003 to 2009, the percentage of total employment represented by the self employed “held steady,” but the percentage attributable to unincorporated self-employed individuals experienced a small decline. This decline was found to be attributable to (i) a decrease in agricultural self-employment, and (ii) an increase in self-employed individuals forming their own corporations.

Interestingly, the article attributes the growth of self-employed individuals forming corporations to the benefits of limited liability, tax considerations, and enhanced opportunities to raise capital through the sale of stocks and bonds. It also references a Small Business Administration website posting on the topic, which mentions the lower cost and greater ease of incorporating and the rising health-care costs. Missing from the list is a desire to reduce their clients risk of worker misclassification, i.e., the risk of them being deemed to be employees of their clients. This appears to have been a prevalent motivation for establishing corporations among technical-service workers, ever since they were statutorily exempted from the safe-harbor protections of Section 530 of the Revenue Act of 1978, by the enactment of section 1706 of the Tax Reform Act of 1986. Moreover, this continues to be a factor in the decision to incorporate by individuals operating in other industries in which the risk of worker misclassification is perceived to be high.

In terms of the composition self-employed individuals, the article indicates that during 2009 unincorporated self-employment rates were highest for workers in the construction and extraction industries – specifically, carpenters, carpet installers, and painters. Self-employment rates among the incorporated self-employed were highest for management, business, and financial occupations – specifically chief executives, farm managers, and construction managers.

The high concentration of self-employment within the construction industry should be a cause for concern in those states that have enacted new laws imposing draconian penalties on firms that misclassify individuals as independent contractors in the construction industry. To the extent that these laws result in construction firms engaging in less subcontracting, and instead trying to do more with their own employees, the result could be a less efficient, less profitable construction industry, which can lead to fewer work opportunities in the construction industry overall, affecting both employees and independent contractors.