The Earned Income Tax Credit and Reported Self-Employment Income

The EITC subsidizes earnings from both wages and self-employment. This paper uses tax return data to investigate how the EITC affects the reporting of self-employment income to the IRS. A difference-in-difference strategy is used, considering three EITC expansions and comparing filers with and without children. Expansions are predicted to increase the reporting of self-employment income in the phase-in region and to reduce it in the phase-out region. Among the lowest-income filers, the 1994 expansion is associated with a significant increase in the probability of reporting positive self-employment income, equal to 3.2 percentage points for unmarried filers and 4.1 percentage points for married filers.