This paper analyzes income under-report problem of self-employed and optimal labor mix when we include uninsurable risk of self-employed income and a preference for being ones’s own boss as key determinants of participation in self-employment. Using a simple occupational choice model, we show that two factors can cause efficiency losses in a market. Since the optimal employee ratio is lower than the current level, we need to be cautious in further increase of income deduction only for employee. This paper also estimates effective tax burden of urban households in Korea using the data in the Households Income and Expenditure Survey. It shows that the ratio of tax burden of the employed households to general income reported in the survey is much higher than that of the self-employed households. It also estimates the difference between the real income and the reported income of self-employed households under the assumption that the employed households reported their income honestly. It concludes that the reported income of self-employed households amounts to about 70% of real income.