According to data recently released by the Small Business Administration, sole proprietors make less money on average, but they face a lower income tax rate.
The report examines the impact of the federal income tax system on small businesses, as well as providing hard data about how small businesses are legally organized. In order to get a more accurate picture of the tax burden on firms, the results are based on the effective, rather than the statutory rate. Researchers defined small businesses as those with revenue of 10 million dollars or less.
Sole proprietorships pay, on average, a 13.3 percent tax rate, less than either small partnerships, who pay 23.6 percent, or S corporations, who pay 26.9 percent. But it's because they tend to make less money. More than half of the small firms filing tax returns in 2004 made less than 25,000 dollars, and just over 83 percent of those businesses were sole proprietorships.
"The results represent the tax code's progressivity—sole props who make more money pay more, but there are a lot that make less," says Dr. Radwan Saade, an economist with the SBA.
The study also found the vast majority, 88 percent, made less than 250,000 dollars in pass-through income, the cutoff for proposed tax increases under the new administration.
"The study is groundbreaking from the perspective that it provides us with such a landscape," says Dr. Saade.