FairTax Overview
Impact of the FairTax on Small Business
Small businesses create a large effect in the US economy.
Nearly six million strong, small businesses (those employing less than 20 people), account for 90
percent of all US employers and employ over 20 million people, about 4.0 per business.39 All this,
despite the adverse effects of the current tax system on small businesses. In the words of one small
business owner: “Starting a small business means doing the one thing I love . . . and 99 that I hate. . . .
A simpler, fairer, and growth-oriented tax code will ease the compliance burden on the small business
owner – allowing them to again focus on the one thing they love.”40
Tax regulations create the most difficulty for small businesses.
Small businesses spend on average $74 per hour to comply with the federal tax code – the most expensive
paperwork burden imposed on small businesses by the federal government. No wonder a recent survey of
National Federation of Independent Businesses membership found that 91 percent of businesses
responded that they used a professional tax preparer: whereas a decade ago less than two-thirds used
professional tax preparers. So it is not surprising that more small businesses identified taxes as the
“single most important problem” they face. “Government regulation and red tape” came in second
place.
Most small businesses pay taxes via the individual income tax.
Although many small businesses are not subject to the corporate income tax, the individual income tax
affects most businesses in the United States. That is because business earnings are often paid through
the individual income tax when “passed through” to business owners. The business income from sole
proprietorships, S corporations, etc. is all taxed at the owners’ individual income tax rates. According to
NFIB research, over 75 percent of small businesses are organized as S-Corporations, LLCs, LLPs, or
Sole Proprietorships, known as pass-through businesses because they pay tax on business income
through the individual income tax.41 L