SETI TAX SEASON REPORT

Transcription

1 TAX SEASON REPORT 2010

2 Introduction During the 2010 tax preparation season (tax year 2009), CFED s Self- Employment Tax Initiative () funded 15 local partners to provide free self-employment tax preparation and essential business products and services to low-income and emerging small businesses. The network of local partners included community-based microenterprise development organizations and free tax prep providers. At the end of the tax season all 15 local partners reported on various aspects of their work. This report is an accumulation of these partners narratives. CFED recognizes the commitment of the Citi Foundation to small and growing businesses and is grateful for its support of. CFED also appreciates the continued support of Capital One, Bank of America Foundation and the Annie E. Casey Foundation. Summary In the 2010 tax season (January-April 2010) and its local partners assisted 12,583 low-income self-employed businesses. All received some form of business support service in addition to free preparation of their 2009 tax returns. In the 2010 tax season, assisted businesses that combined, earned over $11.6 million in refundable tax credits. 15 local partners served 12,583 self-employed businesses in urban and rural markets across the country. Approximately 62% of the self-employed businesses served earned a combined $11.6 million in refundable tax credits, illustrating that the tax code and tax preparation the largest delivery system for federal assistance to low-income businesses. At least 21% of businesses served were first-time self-employed tax filers, which makes tax preparation a powerful tool for reaching brand new start-ups. An important focus of s work supporting these businesses at tax time is to maximize refunds and savings for the business owner. Access to the Earned Income and Making Work Pay Tax refundable tax credits is especially important to the 52% of self-employed filers served who had no W-2 income to fall back on, and to the 21% filing as a business for the first time this tax season. s 15 local partners also helped local self-employed businesses save up to $4.5 million in tax preparation fees through the IRS-supported Volunteer Income Tax Assistance (VITA) program Tax Season Report

3 Helping Small Business Owners Succeed local partners provide tax prep services to self-employed businesses. Tax prep is an opportunity to connect small business owners with other resources, such as business training, micro loans and back office support. How Works Filing business taxes for the first time is a defining event for both the business and the entrepreneur. Confusing yet critical, handling business taxes is an essential financial literacy skill and one that many low-income self-employed business owners are ill-equipped to master. Yet, most start-ups have no affordable resource for the comprehensive tax preparation and business planning assistance needed to start their business right. The goal of the Self-Employment Tax Initiative is to advance the use of the tax code and tax preparation to scale-up the delivery of essential business services to new and growing self-employed businesses. While calculating business taxes is a critical learning experience for every business owner, the strategy goes beyond this exercise. local partners use the annual, mandated tax preparation process as an opportunity to enhance the business literacy and financial skills of start-ups. Sometimes called tax prep plus or wrap around products and services, 21% percentage of businesses served by site that were first-time self-employed filers 2010 Tax Season Report 3

4 local partners offer services that address the tax prep process directly, but that also indirectly offer a lasting benefit to the business. These services vary from partner to partner but may include: business record-keeping pre- and post-tax season trainings estimating business profits and preparing estimated taxes for the upcoming year business credit planning introduction to sector-specific and year-round back-office support incorporating health insurance, retirement and college planning into their business development other asset-building and business development products and services In the 2010 tax season, assisted businesses that combined, earned over $11.6 million in refundable tax credits. As it turns out, the largest direct federal support for microbusinesses comes not through federal credit programs, like SBA or the CDFI Fund, but through the tax code. For example, each year low-income self-employed tax filers claim over $6 billion in EITC refunds while this year, the SBA announced the availability of just $3.6 million in grants for the Program for Investment in Microentrepreneurs (PRIME) to aid low-income entrepreneurs. The use of the tax code as a delivery system for micro businesses is likely to grow in the next tax season. The IRS is considering allowing some VITA programs to file Schedule Cs. This would be a significant policy shift at the IRS which currently disallows the delivery of Schedule C tax prep by VITA programs. s 2010 Local Partners In advance of the 2010 tax season, sought proposals from organizations interested in exploring effective ways to serve the tax preparation and related business planning needs of low-income, startup and growing self-employed businesses. local partners for the 2010 tax preparation season were: AccountAbility Minnesota (Saint Paul, MN) Accounting Aid Society (Detroit, MI) Ariva (New York, NY) California Association for Micro Enterprise Opportunity (CAMEO) (San Francisco, CA) Catholic Charities, Archdiocese of San Antonio (San Antonio, TX) Center for Economic Progress (Chicago, IL) Central Vermont Community Action Council (Barre, VT) Community Tax Aid (Washington, DC) Foundation Communities (Austin, TX) Tax Season Report

5 Greater Philadelphia Urban Affairs Coalition (Philadelphia, PA) KC Cash Coalition/First Step Fund (Kansas City, MO) Nehemiah Gateway Community Development Corporation (Wilmington, DE) Rural Dynamics Inc. (Great Falls, MT) United Way of Central Alabama (Birmingham, AL) United Way of King County (Seattle, WA) These organizations were selected because they represented a diverse and experienced partner network, in terms of geography, client base and sector focus. Twelve of these local partners are past year partners. Program Scale and Impact The tables below show a breakdown of where our local partners focus their work and the number of years that they have been preparing Schedule C and C-EZ returns. Twenty-one percent (21%) of the total self-employed clients served were first-time self-employed tax filers. Thirty-five percent (35%) of the total self-employed filers served were past year clients; 23% of which increased their business revenue from the previous tax year. Each local partner is unique. Some serve urban markets; others have a rural focus while some local partners have a statewide client base. Organizations Focus by Percentage Organization Urban Rural Statewide AccountAbility Minnesota 89% 11% Accounting Aid Society 100% Ariva 100% CAMEO 100% Catholic Charities, Archdiocese of San Antonio 98% 2% Center for Economic Progress 33% 67% Central Vermont Community Action Council 100% Community Tax Aid 100% Foundation Communities 82% 18% Greater Philadelphia Urban Affairs Coalition 94% 6% KC Cash Coalition/First Step Fund 100% Nehemiah Gateway Community Development Corporation n/a n/a n/a Rural Dynamics Inc. 100% United Way of Central Alabama 88% 12% United Way of King County 100% (n/a) = Data unavailable 2010 Tax Season Report 5

6 The network included local partners new to self-employment tax prep while others had many years experience. The average number of clients served was 839, but the individual local partner s client served ranged from 88 to over 2,200. Years of SE Tax Prep Experience Organization < 2 years 2-5 years > 5 years AccountAbility Minnesota Accounting Aid Society Ariva CAMEO Catholic Charities, Archdiocese of San Antonio Center for Economic Progress Central Vermont Community Action Council Community Tax Aid Foundation Communities Greater Philadelphia Urban Affairs Coalition KC Cash Coalition/First Step Fund Nehemiah Gateway Community Development Corporation Rural Dynamics Inc. United Way of Central Alabama United Way of King County Program Operations local partners used both paid and volunteer staff to offer free tax preparation services, helping low-income self-employed filers save up to $4.5 million in tax preparation fees. Seven local partners utilized volunteer staff to complete the majority of their Schedule C returns. Five local partners utilized paid staff to complete most of their Schedule C returns, while just two local partners utilized paid staff only to file Schedule Cs. On average, it took local partners 13 minutes to prepare a Schedule C-EZ form and 40 minutes to prepare a Schedule C. Local partners indicated that the rate for commercial tax preparers in their market to prepare and file both a Form 1040 and Schedule C/C-EZ ranged from a low of $250 to a high of $ Tax Season Report

7 Training and Wrap-around Products Eleven local partners offered pre- or post-tax preparation trainings, either classroom-style or one-on-one to their self-employed clients. The average number of participants, per local partner that offered pre-tax prep training, was 132. The average number of clients served by local partners in the post-tax season was 234, but individual local partner s client base for this service ranged from 9 to over 490. Eight local partners offered or referred their self-employed clients to wraparound/asset-building products. Examples of these wrap-around products and services include checking accounts, savings accounts, savings bonds, business loans, record-keeping services, individual development accounts, retirement savings accounts, financial coaching and business development classes. Demographics Gender Breakdown In total, 51% percent of the self-employed served by partners were female. This rate varied from a low of 33% to a high of 62%. Ethnic Breakdown The ethnic breakdown of tax filers served by local partners was onethird Latino/Hispanic (33%), over a quarter each African American (27%) and Caucasian (27%), and a small percentage of Asian/Pacific Islander (5%) and Native American clients (1%). Six percent of clients were classified as Other. local partners helped low-income self-employed filers save up to $4.5 million in tax preparation fees. 1% 5% 6% 33% African American 27% Asian/Pacific Islander Caucasian Latino/Hispanic 27% Native American Other 2010 Tax Season Report 7

8 Age Breakdown The primary age group served by grantees was the years (45%) cohort followed by the years (39%), 25 years and under (9%) and 65 years and over (7%) groups. 7% 9% Under 25 39% 45% Over 65 Self-Employed Filing Status Single filers (47.5%) were the primary self-employed filers served, followed by those filing as Married filing jointly (26.6%), Head of household (23%), Married filing seperately (2.5%) and less than 1% filed as Qualifying widow(er). Over half of local partners had a client base that was 50% or higher Single filers. It is important to note the high rate of single filers because by and large, single filers are not eligible for the EITC because they do not have dependants, though they may be very low-income. This is one reason why EITC claim rates are not higher than they are at 43%. Twelve local partners had a significant share of clients filing as Head of Household, ranging from 20-36%. 2% 23% >1% 27% 45% Single Married filing jointly Married filing separately Head of household Qualifying widow(er) Tax Season Report

9 Business Type The five major types of businesses served by local partners are childcare (13%), construction contractors (8%), janitorial (8%), direct sales including Real Estate Agents and Food Vendors (5%) and delivery, including truck drivers, couriers and taxi drivers (5%). Twelve percent of the network client base was classified as other. This category included the following business types: jewelry and crafts, home improvement, photography and desserts. 15% 10% 5% 0 Personal Service Construction Daycare provider Janitors Home healthcare Artists Landscape Tutor Direct sales/real estate/ Food vendors Delivery (truck/courier/taxi) Retail Other Business Expenses It is important to note common business expenses claimed by clients because each type of expense has unique tracking and record keeping attributes. This information allows local partners to develop tools and resources that are most useful to their client base. grantees identified the five highest business line item expenses of their self-employed clients as, auto (33%), other (12%), supplies (12%), tools/supplies (11%), and office expenses (10%). Business Net Profits and Loss Eighty-eight percent (88%) of the self-employed clients served by local partners reported net profits averaging $5,066 (median of $5,219). Nine percent reported net losses averaging -$3,868 (median of -$3,247) Tax Season Report 9

10 Tax Credits and Deductions A total of 5,454 (43%) self-employed filers received the Earned Income Tax Credit (EITC); an average refund amount of $1,691 (median of $1,581). Twenty-nine percent (29%) received the Child Tax Credit; an average amount of $1,193 (median of $1,130). Sixty-five percent (14 programs reporting) received the Making Work Pay (MWP) tax credit averaging $340. The data reveal a broad range of MWP tax credits to self-employed filers (17% to 95%) attributed primarily to difficulty in exporting MWP data using Tax Wise. Instead, some local partners used random sampling while others had volunteer staff do the calculations manually; some organizations could not collect the data for all clients and only reported partially. After taking into account all tax credits and deductions, 31% of the selfemployed filers served owed an average of $805 (median of $937) in taxes, the bulk of these taxes were for Social Security and Medicare which, unlike wage earners, the self-employed pay through the regular income tax filing process. Supplementing with Wage Income 65% of self-employed tax filers received the Making Work Pay tax credit, averaging $340. Forty-eight percent of self-employed filers served supplemented their business income with W-2 income; an average of $15,020 (median of $15,218). Less than half (43%) of the self-employed clients served had their income reported on Form 1099 used for independent contractors/freelancers. Based on best estimates, (21%) of the filers who had income reported on Form 1099 were unaware that they had to file a Schedule C/C-EZ because they considered themselves employees. Equivalently, it is estimated that 79% of all the self-employed clients served are intentional businesses, as opposed to those who view their self-employment as a hobby. Conclusion As we close on the fourth year of the demonstration, CFED is confident that it made a difference for the tens of thousands of low-income entrepreneurs served. Moreover, CFED has formalized a new field that bridges microenterprise and community-based tax prep to better serve lowincome entrepreneurs. Lastly, CFED has made significant inroads at the federal level on significant policy change that will take this field to a new level in future tax seasons. s local partners continue to report great demand for self-employment tax prep services. CFED will continue to foster innovation in this field by supporting learning clusters, including one focused on low-cost self-employment tax prep Tax Season Report