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The Fading American Dream of Working for Yourself

The self-employed middle class is far smaller than we often assume.

We Americans pride ourselves on being entrepreneurial, and praise for the start-up culture that created Apple, Facebook, Twitter, Airbnb and other global success stories is a staple in the media. But the data paints a much different picture: when the self-employment rate is compared among the 34 wealthy countries that make up the Organisation for Economic Co-operation and Development (OECD), the U.S. comes in dead-last at 6.6 percent. Germany and Japan both have self-employment rates above 11 percent.; Italy and South Korea have rates above 25 percent.

Last time I checked, The American Dream was not “working for someone else.”

One common way to define the middle class is in terms of self-employment and the ownership of one’s work. As Marian Kester Coombs wrote recently, “Economically, the middle classes were once proprietors, self-employed owners of property and their own labor.” In Coombs’ analysis, “Middle class is not an income level but a material relationship to society,” specifically, ownership of one’s labor and income-producing capital: “the key middle-class elements (are) independence, self-sufficiency, ownership, entrepreneurship, and real social power.”

So how many of America’s labor force of 147 million are both self-employed and middle class? We can throw around vague definitions and get nowhere, or we can dig into hard data. Are you game for the data dig?

In a previous article, I sought to define middle class both by income and financial characteristics. For the sake of simplicity, let’s set an individual income of $50,000—close to the nation’s median income of about $53,000—as the minimum threshold of middle class membership.

To answer how many Americans are both self-employed and middle class, we must once again dive into a statistical thicket that defies easy exploration.

Let’s set aside businesses with employees and just look at self-employed: sole proprietors and the incorporated self-employed. (The majority of these are self-employed professionals such as physicians, attorneys, engineers, accountants, etc. who incorporate for tax and liability reasons.) According to the IRS’s income and deduction data for tax year 2013, the total number of individuals who reported taxable income was 147.4 million; the total number who paid self-employment income tax was 18.9 million.

On the face of it, this looks like a big number, almost 13 percent of America’s work force. But does making a few thousand dollars a year in a side business meet Coombs’ key attributes of the middle class: independence, self-sufficiency, ownership, entrepreneurship? Clearly not.

How many self-employed earn $50,000 or more annually? About 7.5 million, or 5 percent of America’s work force. But other data suggests the independent self-employed middle class is a lot smaller than 5 percent.

This is not an abstract topic to me. My wife and I are independent self-employed. We don’t get a paycheck from another employer nor do we have any income from trust-funds or the government. This is what the old standard of self-employed middle class meant: all of the household income is generated by assets and labor you own.

One of the few deductions reserved for the self-employed is health insurance: since there’s no employer to pay this hefty expense, the self-employed either go without insurance or pay the full cost themselves. (In our case, $13,000 a year for a basic plan with no eyewear, dental or medication coverage.) Given the high cost of unsubsidized health insurance, anyone who qualifies for this deduction will take it, as it offers a substantial tax break. A grand total of 2.5 million taxpayers with incomes of $50,000 or more took this deduction.

This means millions of people with $50,000 or more in self-employment income paid no health insurance premiums. Either they chose to have no health insurance (in which case they no longer qualify as middle class by my definition), or their spouse is conventionally employed and provides healthcare coverage for the entire household.

By this measure, only 2.5 million unincorporated workers are truly independent self-employed. That’s a razor-thin 1.7 percent of the nation’s work force.

The incorporated self-employed have their corporations pay their insurance, so let’s add in the 4.5 million S-corporations/partnerships that reported income of $50,000 or more. That gives us a total of 7 million independent self-employed.

Returning to small businesses, the Census Bureau reports that about 5.1 million firms are “very small enterprises,” defined as having 20 or fewer employees.  This category includes the vast majority of businesses associated with middle class enterprises: dry cleaners, cafes, auto mechanics, restaurants, remodeling contractors, technical services and so on. Clearly, these fit Coombs’ key attributes of the middle class: independence, self-sufficiency, ownership, entrepreneurship.

There is one other class of independent self-employed: small landlords and landladies. About 2.4 million taxpayers report net rental income of between $50,000 and $200,000.  This income is not reported as self-employment income (Schedule C) but as supplemental income (Schedule E).  Those small landlords and landladies who are actively engaged in managing their rental properties certainly qualify as self-employed middle class in terms of ownership and entrepreneurship. (Many may have other jobs, but we’ll count them as potentially self-employed.)

If we add all these categories up (7 million + 5.1 million + 2.4 million), about 14.5 million people likely qualify as self-employed middle class (or upper-middle class). It’s a considerable number, but it’s only 10 percent of the nation’s work force and 4.6 percent of the nation’s 316 million people. If working for yourself and achieving a middle class income is the American Dream, we might want to take a hard look at why a mere 10 percent of the work force has reached this goal.

Charles Hugh Smith is the author of An Unconventional Guide to Investing in Troubled Times and writes at OfTwoMinds.com.