The Self-Employed Middle Class Hardly Exists Anymore

Many people rightly aspire to improve their household's state of resilience through actions such as storing emergency supplies, starting a vegetable garden, and learning basic readiness/maintenance skills, etc. In general, resilience boils down to self-reliance. But like it or not, in our largely urbanized society, true long-term self-reliance needs to include some measure of financial independence.

By 'financial independence' I don’t mean so much wealth that you no longer have to earn a living. Rather, in this discussion, financial independence means owning income streams that you control lock, stock and barrel. Some of this income may be passive (for example, royalties earned off a patent you own) but for most people, 'independent' income is actively earned via their own labor (i.e. self-employment).

Of course, the easiest path to financial independence is being born into a wealthy, well-connected family. But since few of us win that born-rich lottery, this article addresses the important question: How do “the rest of us” carve out financial independence?

How Many Make a Middle Class Income from Self-Employment?

Let’s start by defining 'self-employment' as an enterprise without employees that has more than one client. If a consultant’s entire annual income is from one client year after year, for example, the Department of Defense (DoD), the consultant is more of a proxy employee of the DoD than a sole proprietor. In an era where Corporate America and the government attempt to shed employment costs by hiring independent contractors rather than employees, we need to differentiate between quasi-employees who work for one client and the truly self-employed. Unfortunately, the officially-reported employment data does not distinguish between the two.

But of greater use is a recent article published in The State of US Small Businesses that included a chart by regarding self-employment in the U.S. According to’s research, there are about 22.5 million businesses with no employees in the U.S. that report at least $1,000 in annual receipts.  Of these, 3 million are partnerships or S corporations (typically licensed professionals such as attorneys, engineers, architects, etc.) and 19.4 million are sole proprietors. found that only 20% (4.4 million) of these no-employee enterprises have receipts of $50,000 or more annually. The remaining 80% earn considerably less: 5.5 million bring in less than $5,000 annually, 3.8 million gross between $5,000 and $10,000, 5.7 million bring in between $10,000 and $25,000, and another 3 million had receipts of between $25,000 and $50,000.

Interestingly, this reflects the Pareto Distribution (a.k.a. the 80/20 rule): the top 20% earn the majority of the income.

In other words, relatively few of these sole proprietorships bring in enough money on their own to fund a relatively middle class lifestyle (i.e. a minimum income of $50,000, though a more realistic minimum in high-cost coastal regions is $100,000 annually). 

Checking The Math (Stay With Me Here)

It's not easy to collate meaningful data on self-employment, as various agencies count jobs and income in different ways. The Bureau of Labor Statistics (BLS), for example, measures two types of self-employed workers: the unincorporated and the incorporated. The unincorporated may have employees, but typically do not (i.e. they are sole proprietors). The incorporated have employees, starting with the owner, as the BLS counts the incorporated self-employed as employees of their own corporation.

According to the BLS, there are about 121 million full-time jobs and 27.3 million part-time jobs, for a total of 141 million jobs. But this includes employees working only a few hours a week and self-employed people earning only a few thousand dollars annually.

For a more useful context, let’s turn to IRS tax return data, which isn’t adjusted seasonally or filtered: specifically, the Individual Statistical Tables by Size of Adjusted Gross Income.  These tables contain the total number of tax returns and the gross income and taxable income after credits and deductions of all taxpayers.

All data presented below is from Table 1.1, All Returns: Selected Income and Tax Items for tax year 2012, (the most recent data available) and Table 1.4, All Returns: Adjusted Gross Income, Exemptions, Deductions, and Tax Items for tax year 2012.

When we examine Table 1.1, we find there were about 145 million returns filed, and 93 million had taxable income after credits and deductions. Roughly 22 million workers earned less than $10,000, 35 million earned less than $15,000, and 46.5 million earned less than $20,000.

Of the 93 million who paid some income tax, the bottom 72 million paid a bit over 22% of the total income tax paid, and the top 20 million paid about 78% of the tax. Once again, the Pareto Distribution is visible; as the top 20% paid roughly 80% of the total income tax.

In Table 1.4, the IRS lists about 120 million workers with wages/salaries, 17.5 million with a business or profession, and about 5.5 million partnerships and S corporations.  These two add up to around 23 million people with some self-employment income.

As noted above, the incorporated self-employed have one employee—themselves—which partially explains why only 18.6 million taxpayers took the deduction for self-employment taxes: the incorporated self-employed are counted as employees receiving wages/salaries.

Of the 18.6 million who paid self-employment tax (15.3% of earned income, as the self-employed pay both the payroll taxes of employees and employers), about 7 million had gross income of $50,000 or more.  This is considerably more than’s estimate of 4.4 million with gross receipts of $50,000 or more.

It’s important to note that enterprises deduct operating expenses from gross income, so the net income of those with $50,000 in gross income can be considerably less. Enterprises with high operational expenses might declare $50,000 in gross income, deduct $40,000 in operational expenses and declare a mere $10,000 as net income.

Roughly 4.2 million partnerships and S corporations had receipts of $50,000 and up. Since the IRS data doesn’t separate partnerships/S corporations with employees and those with no employees, we can use’s estimate of 3 million self-employed partnerships/S corporations.

One useful clue to the number of self-employed people who earn enough to support a middle-class lifestyle is the number of people who take the deduction for paying their own health insurance premiums (“self-employed health premium deduction”).  As we all know, healthcare insurance in the U.S. is terribly expensive unless it is subsidized by the government or an employer.  By definition, there is no employer to subsidize the healthcare insurance costs of the truly self-employed, and those who qualify for government subsidies via ACA (Affordable Care Act, or ObamaCare) will only be able to take the self-employment deduction for the portion of the premium they pay.

About 3.9 million taxpayers took the self-employed health premium deduction.  (The incorporated self-employed would have their corporation pay the healthcare insurance, so they would not qualify for the deduction.) Of those who took this deduction, only 2.4 million reported gross income of $50,000 or more.

A self-employed person with a spouse who receives healthcare coverage for the household from her employer would also not report this deduction, as the premiums are paid by the spouse’s employer, not the self-employed spouse.

If we consider all this information, it seems that approximately 15% (23 million) of the 145 million people filing tax returns reported some self-employment income.  The top 32 million taxpayers (22%) earned roughly 78% of all taxable income.  Based on the IRS data and deductions only available to the self-employed, of these top earners, perhaps 4 or 5 million are self-employed (roughly 15% of the top 32 million taxpayers). Of these approximately 3 million are estimated to be professionals such as accountants, attorneys, architects, engineers, consultants, etc.

The Punchline: It's Hard, But Worth Doing

It's sobering that in a nation of 317 million people (of which 145 million people file tax returns), only perhaps 3% of all those reporting income are self-employed people earning enough to support a middle class life without a working spouse.  Around 3 million of these 4-5 million are independent professionals, leaving a few million self-employed non-professional Americans earning a middle class income.

Clearly, while the opportunity to earn an independent income via self-employment is still available to millions of Americans, it isn’t easy to generate a middle class income outside of being employed (or quasi-employed independent-contractor status) by the government or Corporate America.

We have to ask: How meaningful is self-employment in an economy that's now so completely dominated by the government, finance and Corporate America that only 3% of the workforce earns a reasonably comfortable living via self-employment?

On the positive side, 18 million people are augmenting their household income with meaningful self-employment and sole proprietor earnings.  These income streams are critical self-reliance/resilience assets that may grow with time as the self-employed learn more skills and increase their income-generating abilities.

And that's the key takeaway here. It's that minority who have worked to create additional independent income streams who will fare much better when the next financial crisis hits, resulting in widespread layoffs across corporations and government contractors alike. Losing some, even most, of your income is much easier to persevere through than losing all of it. 

In Part 2: A Promising Framework For Developing Independent Income, we break down the primary sources of independent income, which include but are not limited to conventional self-employment. We will also discuss the promise of the emerging Mobile Creative Model for helping motivated workers develop financial independence.

Click here to read Part 2 of this report (free executive summary, enrollment required for full access)

This is a companion discussion topic for the original entry at

Thanks for the article. Having a sole-proprietorship or S Corp is a must. As any wage earning income can be taken from you at a moment's notice, it's imperative to have some type of self-employment that you can ramp up. My SP brings me anywhere from 15 - 30% of my income on any given year. If I lost my wage earning job (teaching), I can ramp up my business to soften the blow and continue paying the bills. My business also brings many tax write-offs. One thing worth mentioning is that although the IRS will consider your business a hobby if you don't declare a profit in at least one of the first five years, there are ways around the profit rule. For instance, you can declare a loss year after year if you can substantiate and prove that your SP is needed to keep you competitive in your wage earning job/field, as is the case in my field.
It goes without saying, having more than one career may be more work, but it can also be less stressful because you're not putting all your eggs in one basket.

Aloha! Mahalo Charles! Since I first heard the name Joseph Campbell back in the 1988 his quote "Follow your bliss" is always ringing in my ears! I started my first business when I was 16 years old in Perth, Western Australia and it was amazingly successful despite my parents always telling me to shut it down and despite I was a Stranger in a Strange Land, being an American teenager in Oz. I had created jobs at 16, but I did not even think of it as "creating jobs" at all. I thought of it as a very generous "income stream" that gave me a stepping stone to do what I really loved to do at a very young age. At that time it was Surfing! Being an entrepreneur became addictive and ever since then I have sought that addiction and become a Type A entrepreneur. I saw so much opportunity there in Perth in the 1970s. To me it was like walking around picking up gold nuggets off the ground that nobody else saw. So the "bliss" was there long ago before I heard of Joseph Campbell, but I soon discovered that the cost of bliss was high.
I realized that once you had that income stream there was a gauntlet of "bliss killers" lined up to take your economic bliss away. Finally that highly successful business was ended by the government of Australia who started confiscating my imported goods. My "imported goods"? The Beatles, Elton John, Deep Purple, Cream, John Mayal, Van Morrison, Neil Young and a few others. I imported record albums taking advantage of the currency arbitrage between an AUD and a USD. I saw a niche that needed fulfilled but the government said NO! Still even with all that feeling like a salmon swimming upstream that "fiscal event" sparked a desire and a path that few 16 year olds were on. To this day no high school or university teaches that path way. There is no Entrepreneur 101 at Stanford! In fact the government now does its best to make sure that 3% you speak of becomes 1% and finally 0%. So what is "the bliss of bliss"? The huge reward is success, but success on your terms and nobody else's!

I still do that today. I have been "self employed" for some 40 years. I can tell you it is not like it used to be. As a 16 year old my business put me in the 9.6% revenue group by 1970s nominal dollars, but by todays dollars that 16 year old was in the 2.2% group! My business in California in 1992 until 2003 put me in the 2.2% revenue group. My business ventures prior to 2009 put me in the high 7.2% group and now since the "Great Financial Crisis" I am in the high 9.6% group. What government, all government levels, do is destroy the hell out of the "bliss"! No two ways about it … they're "bliss killers"! I am constantly amazed that taxpayers actually hire government workers at exorbitant salaries to ruin America. These are people who could not survive in a real free market economy. Whenever I encounter them I always ask myself in the back of my mind … "Would I hire you?" About 80% of the time the answer is NO! By my standards though! Now where I "live and bliss" I am such a fish out of water it is shocking. Still even though I no longer reside in the 2.2% revenue group the benefits of living here in Kalapana, Hawaii versus the freeway jams of San Francisco is unmeasurable. I know Charles appreciates the Hawaii "premium" in terms of quality and longevity of life. I have since I first came here in 1969!

My advice to future generations is to remove as much of government out of your way as possible. Unknowingly, in time, BIG GOVERNMENT does that to itself! In the meantime … go find "your bliss"! But get ready for "hell to pay" when you find it!!!

Thank you, gillbilly and kaimu for sharing your own experiences and insights. You both highlight key features of being self-employed/building a 2nd or 3rd income stream:

  1. flexibility of owned enterprises–as gillbilly points out, this includes write-offs (incl. travel, with a lot of leeway on entertainment and travel expenses) and also the ability to expand the business as needed.

  2. As kaimu explains, the govt stands ready to crush any enterprise, if not by design then by default, as the govt justifies its existence by imposing and enforcing regulations–some of which are common-sense life-safety, but many of which make zero difference to safety, public health etc if they were eliminated. 

I personally have no problem complying with common-sense life-safety/public health regulations, but much of the regulatory burden on small biz does not pass this simple test of utility/public good. 

There is a growing awareness that home businesses should have a legal place in America, and some states now allow home-based businesses up to certain limits of income (I recall it's $20,000 in Calif.)


I searched and asked many times before - how to get labor statistics on those who deemed as "employed" (mainly self-employed) but generate no income and trends. I got no answer as BLS doesn't give monthly data on this front. The author gives us current picture although, if possible, I would like to see trend - more people earn less or no income or more. Also, how to filtrate those companies been setup by employed as tax deduction tool (as people frequently said - Delware corporation - set one to deduct costs from salary).

Darturtle, you make an excellent point. I haven't found any truly comprehensive source of the kind of labor market stats you describe, but the IRS data is at least 'real" and not filtered or "seasonally adjusted", nor is it based on "surveys." 
Not only do we not know how many people have small businesses set up as write-off entities (not a bad idea, given the dearth of middle-class tax shelters), we also don't know the source of people's incomes–there is no way to track how many households have multiple income streams.

We do know 46 million people earn modest sums–but the IRS data doesn't include social welfare and government payments, other than Social Security.  So a household receiving Section 8 Housing subsidies (worth at least $20K in most areas and much more in high-rent areas) and Medicaid (subsidized healthcare, worth another $20K minimum)  appear to have a low earned income, but their actual income is $40+K higher due to govt. subsidies.

ALOHA!! Yes Charles and the NFIB addresses many issues that small business faces in every US state. Go to their website and you can see every day there are legal battles with Congress. Large corporations and banks have lobbies and essentially NFIB is the largest small business lobby in DC.
What I propose is a SBA SubPrime. We have had one for the mortgage sector, the auto sector, students, but what about the small business sector? If you go to apply for a Small Business Loan from the SBA they ask that you prove to them that you don't need a loan in order to get a loan. They even ask you to put up your home as collateral.

Had Wall Street securitzed small business loans instead of mortgages America would have been better off. We might have gotten another Apple out of the mayhem! At the least Americans would have had more jobs available. Waste is waste and it seems if government must waste then we need to implement programs that waste money on providing jobs not temporary McMansion vacations or Lexus two year joy rides. Besides more 9-5 jobs have more trickle down.

Let me give you just one example of waste in the Hawaii ag sector. We all know the main reason government creates licensing requirements is to collect fees. Twice a year I have Hawaii Ag inspectors come out to inspect my farm. They always roll up in a brand new SUV and there are 2-3 inspectors when only one will do. Mostly we stand around "talk story" and there is little inspecting going on. Meanwhile every time I ship Hawaii product to California I am faced with Cal Ag inspectors opening my boxes. So I get two States inspecting the same product. I have seen instances whereby the Cal Ag inspectors will override Hawaii Ag inspectors and declare a box contaminated and reject it even if Hawaii Ag approves it. Just to show you how Gestapo the Cal Ag inspectors are if they find one ant … just one … they classify it as an "infestation" and burn the entire box. As if there are no ants in California. Yet how many invasive species have come into California and Hawaii over the years where no inspections took place? Since 2002 here in Hawaii it is hard to count how many invasive species have come in thanks to lax inspection.

Let me explain the absurdity. We all know how bugs and vermin get transported to different lands. Historically they are unwittingly brought in on boats and/or aircraft. Instead of inspecting already certified nurseries who already control and inspect their own product shouldn't state ag inspectors inspect transport companies who do no inspections at all. 

Add in the lengthy reaction time Ag departments exhibit with verifiable invasive threats and it is comical that they even exist for so many failures. Here in Hawaii the coqui frog could have easily been stopped a long time ago, but the Hawaii Ag Dept deemed it a non-threat just like California Ag Dept did. Just in my area I reported coqui frogs two years prior to the Hawaii Ag department taking any action. They did not even care. Now they care and now they inspect my farm every six months for coqui. If I didn't know better I would think they reacted very slowly in hopes of creating more job security. The more invasive species in Hawaii the more reason to hire more Ag inspectors.

Understand this. Thanks to the Hawaii AG Dept failures I now have to spend time and money to control invasive species that government allowed to exist. They fail I pay! I essentially pay their salary, because they invoice me $140 every inspection and I pay to have them inspect their failures! HA! It's insane and inane! Let's see $140 for a 30 min inspection. Divide by three for three inspectors. Then times by two for one hour rate and they make $93/hr plus medical and pension.

Distil it down and I pay government to make my work load worse! 

The Federal Register that lists all the regulations we Americans must follow is 78,025 pages as of 2014. In 1936 when it started it was only 2,300 pages. Charles my guess is you and I violate Federal regulations every single day of our lives since birth! We pay government, mostly lawyers, to write these regulations and to enforce them. What are the chances that when you elect a Congress full of lawyers that you end up with a Federal Register of 78,025 pages? They work 24/7 regulating our lives. We pay them to do that. We pay them very well!!! Why?

Give us back the land!

it's make easy for me to understand Thanks for sharing such a good content. Keep sharing kursi tamu

I opened my law office in the fall of 1999 and but for one year, grew each year until 2008.  Beginning 2008, for five consecutive years my law office did worse than the year before.  I had a little bounce in 2013 and then in 2014 I was back down to 2012 levels (very low).
Having a fire in 2010 that burned me out of my home and office did not help.

During the crash, I did not begin to have an understanding of what was happening until I watched Chris' Crash Course and a piece by Porter Stansberry.  Then I read the Transition Handbook - a great guide and free online.

Since then, I've built more resilience into my life.  I rent out three of my four bedrooms to three fabulous ladies, of which two are in my best friend category.  I also rent out my apartment (not to my children).

Four years ago, I started growing food and I take the surplus to market every Saturday.  I am getting better at saving seeds and have learned to make most of my own fertilizer.  I close my law office on Fridays for the harvest.

I started a new service in my law office called Self Help Legal Services.  For a low fee, I prepare the client's paperwork or trial notebook and provide a step by step instruction letter so the client can represent him/herself in court.

Even with these changes, I'm not yet back into middle class.  I still have debt problems and even an IRS lien out there, but I have multiple streams of income and one of my housemates shares maintenance expenses with me as co-owner of the home.   I have lots of room to expand my growing and processing of food, and with better marketing I could greatly increase my income from Self Help Legal Services.

Approaching 55 and now working just about 7 days a week.  Not what I expected, but the gardening has saved me.  I really only think of it as a 4 ( or less) day work week, and the rest of the time I can be out in the garden!

Everyone will have to become very clever, industrious and productive.  We are going to have to cooperate more with others.  There are more great challenges coming our way.


This is an excellent summary of self-employment, Hladini.  There are high costs in terms of workload and responsibility compared to working for the govt or corporate America. As a rule of thumb, I would guess the average self-employed person makes about half of what the state/corporate equivalent makes, once you deduct the costs of benefits such as healthcare insurance that are covered by the state/corporate employers.
The payoff is largely psychic/spiritual, if you will–I never hear any of my friends/family who work for the govt, quasi-govt or Corporate America lauding their job or work, describing how much joy it brings to them…

As discussed the gooberment is in business for only one reason… In the process a side effect is they make it more difficult to make a buck because of their sheer stupidity while they are essentially stealing money from motivated,  successful people and redistributing this to those that are not…  The day will come when it will stop, only due to the fact the house of cards is to big, and must soon fall.

Don't be underneath when it does…