SETI Small business tax assistance practitioner bulletin Community College Microbusiness Development Program & Tax Initiative StartZone at Highline Community College Small businesses provide economic security and stability for millions of American families. Creating and owning a business has long been heralded as the path to financial success and self-fulfillment in the United States, and for some, creating one s own job self-employment is the best possible source of employment and income. In a nation clamoring for jobs, promoting and formalizing small startup businesses provides a viable solution. Since paying business-related taxes is required of all business startups, the tax preparation process is a built-in, structured opportunity to reach out to startups and provide them with access to business development and asset-building services. Since 2006, the Self-Employment Tax Initiative (SETI) has worked with community-based organizations that offer free or affordable tax preparation services for low-income, self-employed individuals. This bulletin is designed to provide other tax assistance providers, microenterprise development organizations, credit unions and other community-based organizations with data, lessons learned and reflections on an innovative strategy for self-employment tax assistance provision. The Model: Community College Microbusiness Development Program & Tax Initiative Innovation at StartZone StartZone is a microenterprise development initiative of Highline Community College in King County, WA. Established with a grant from the U.S. Small Business Administration, StartZone is committed to helping South King County residents achieve financial self-sufficiency by providing accessible and affordable training, consulting and other support for building small businesses that are bankable, profitable and sustainably connected to the local economy. One of StartZone s key initiatives is a program that offers tax preparation services and links self-employed individuals to other business support opportunities at the community college. In particular, during the 2011 tax season, StartZone provided free tax assistance to small business owners using volunteers from the community and accounting students from the community college. Other partners included the Washington Community Alliance for Self Help (Washington CASH), Seattle Housing Authority, United Way of King County and Key Bank. The Self-Employment Tax Initiative The Self-Employment Tax Initiative (SETI) is a small business development strategy that takes advantage of the tax code to help low-income, self-employed individuals formalize and grow their businesses, create jobs and access tax-based asset building opportunities. SETI recognizes the tax season as an incredibly opportune time to introduce selfemployed business owners to a host of products and services that support small business development and asset building. The SETI team offers technical assistance and funding to community tax preparation providers, supports related product and service innovations, conducts practice-related research and promotes sound tax policies. The SETI Innovation Cluster For the 2010 Tax Year, SETI invested in a group of three community-based small business tax assistance models, each demonstrating a different servicedelivery method. The three innovative models include a low-cost, fee-for-service model in Brooklyn, a community college partnership in Washington and a cluster of microenterprise organizations offering tax assistance in California. These three programs make up the SETI Innovation Cluster, which is designed to exhibit creative models of tax assistance paired with business development products and services and to explore which methods are most effective for serving low-income self-employed individuals. 1200 G Street Suite 400 Washington, DC 20005 202.408.9788 www.cfed.org
StartZone s core goals for this program include the following: Increasing volume of small business taxpayers. During the 2010 tax season, StartZone provided tax assistance to fifty self-employed taxpayers. For the 2011 tax season, their goal was to double that volume and serve 100 small business owners. Serving a greater volume of self-employed taxpayers would enable StartZone to have greater community impact. It would also help them leverage the value of their resources; student volunteers would receive more learning opportunities and StartZone staff time and workshop offerings would be maximized by serving more clients at once. Reaching out to businesses in the informal economy. StartZone maintains a core commitment to helping people start businesses that are legal, bankable and profitable. Many of the self-employed filers they serve started with informal, cash-based businesses and keep few or no records. StartZone believes that self-employed filers must meet their tax liability and formalize their businesses through tax filing in order to properly position themselves to take advantage of opportunities to grow their businesses. Increasing the number of filers that enroll in StartZone for further wrap-around support. Nearly all small businesses must pay business taxes in the very first year of operation, and this encounter with tax preparation can be both intimidating and, at the same time, a powerful teachable moment for business startups. StartZone focuses on this annual tax preparation process as an opportunity for educating self-employed business owners and connecting them to other StartZone services that will help them grow their businesses. Why is this innovative? Since StartZone s microenterprise development program and tax initiative is located at a community college, the program can take advantage of many of the resources the college has to offer. StartZone s Business Tax Center allows income-eligible business owners to receive tax assistance from trained and professionally supervised volunteers that help taxpayers complete and file the Form 1040 and Schedule C form for small business tax filers. StartZone also helps filers determine eligibility for the Making Work Pay and Earned Income Tax Credits. Through its unique location at Highline Community College, StartZone has access to accounting staff, faculty and students. By providing tax assistance as part of a broader, ongoing wrap-around business administration support system, the program can offer more comprehensive support to small business taxpayers than a traditional community-based tax assistance program. StartZone offers workshops to help business owners assess their readiness and the feasibility of their business goals, provides business plan writing clinics and teaches business owners how to improve marketing, backoffice operations and business finance. StartZone offers a program called MicroMentor, which connects members to hundreds of professional business mentors across the country for help with business fundamentals and provides other monthly opportunities for networking with other StartZone members and local businesses. This year, they also began the Turnkey Back Office, matching business owners with professionally supervised accounting student interns to help them design, install and use simple business management systems. This connection between business development services and tax assistance is core to the self-employment tax strategy. Key Program Outcomes for Tax Year 2010 Services Provided Between February 1 and April 15,2011, StartZone prepared 60 tax returns for self-employed filers. Compared to the previous tax season, they increased their volume by 20%, but still fell short of the goal of doubling last year s volume to serve 100 self-employed taxpayers. Page 2 Community College Microbusiness Development Program & Tax Initiative Innovation at StartZone
This year, StartZone s five volunteers were managed by Nigam Shah, the part-time Business Tax Center Manager and Business Specialist, a CPA who has worked in public and private practice for over twenty years and currently owns and operates his own firm. StartZone offered two days of scheduled tax appointments Tuesdays and Thursdays between 4 p.m. and 8 p.m. in order to accommodate small business taxpayers after typical work hours. Three of these volunteers were accounting students at Highline Community College, each of whom received course credit for the applied learning experience of providing small business tax assistance. During the tax season, StartZone also held two Super Saturday sessions, one-day events designed to connect small business owners with tax planning advice, tax preparation services and additional services. One of these events was a Financial Fitness Day held in conjunction with the Seattle-King Country Asset Building Collaborative at a local community center. The Collaborative is comprised of more than two dozen community partners that each provided an array of free services to community members to help them understand, manage and improve their financial security. StartZone staff and volunteers were available to prepare self-employment tax returns on site. StartZone helped clients get organized before receiving assistance by requiring the completion of two forms, a Client Application and a Tax Organizer. The Client Application provided StartZone with general contact information about the client, which was used in part to confirm that they live within the StartZone service area, and demographic data to confirm that the taxpayer fit the income limits necessary to receive tax assistance at StartZone. The Tax Organizer confirms the criteria that each self-employed taxpayer must meet in order to receive assistance at StartZone. This form also helps the taxpayer categorize their expenses. The manager estimates that it took clients an additional forty five minutes to fill out these forms before coming in for their appointments; once those intake forms were completed, volunteers required about 75 minutes to complete the taxpayer s return and share it with the supervisor for quality review. StartZone also offered optional pre-tax season workshops to help business owners prepare for tax assistance by organizing their records and implementing systems for tracking expenses. However, only 10% of the 60 taxpayers actually attended these trainings. In spite of the quality materials, volunteers and staff they had available this year, StartZone struggled to increase the quantity of filers seeking tax assistance at the Business Tax Center. Mike Skinner, StartZone s Program Manager, cited marketing and outreach as two of the greatest challenges this year. This year, staff attempted to develop relationships with community organizations that serve individuals who might require small business tax assistance. They sought partnerships with local trade associations representing truckers, artists, taxi drivers, day care providers and home health aides. Truckers working at the Port of Seattle were a key target audience, so staff met with the African Chamber of Commerce, which represents many independent truckers, and shared his marketing materials with them to distribute to their members. They provided these organizations with fliers to share with their members and even had advertisements placed in the home health aide association s monthly newsletter. Despite these efforts, StartZone was unable to reach its goal of doubling the volume of clients from the previous tax season. Of the 60 taxpayers served by StartZone, 32% were return clients from the year before. Many were also existing StartZone members, and an estimated 25% were referred from Washington CASH, which provides hands-on education, support and access to capital needed to launch and manage successful small businesses, with a focus on low-income, women and minority populations. Unlike previous years, StartZone did not receive many referrals from area Volunteer Income Tax Assistance (VITA) sites run by the United Way of Greater King County. Clearly, in this model of self-employment tax delivery, familiarity and trust built with clients by StartZone and similar assetbuilding organizations, like Washington CASH, are critical factors in recruiting and maintaining clients. Clients Served StartZone is committed to serving immigrants, minorities, women and people with disabilities in Southwest King County, Washington more than half of their members are women and more than two-thirds are people of color or recent immigrants. This year, 67% of the self-employed taxpayers that visited the Business Tax Center were women and the remaining 33% were men. Forty-seven percent of the small business owners were White, while 15% were Community College Microbusiness Development Program & Tax Initiative Innovation at StartZone Page 3
Black or African-American, 18% were Asian/Pacific Islander, 15% were Latino/Hispanic, 2% were Native American and 4% identified as Other. Two percent of the self-employed taxpayers were people with disabilities. Twenty-two percent of these small business owners spoke another language besides English at home as well. Most (60%) of the Schedule C filers were between the ages of 25 and 45, while 35% were between 46-65; only 2% were younger than 25 and 3% were older than 65. More than 85% of the self-employed tax filers served at StartZone earned less than $40,000 in Adjusted Gross Income (AGI) in 2010. Taxpayers AGI includes all income earned, including wages reported on a Form 1040. Of the taxpayers reporting earnings from self-employment, nearly half (45%) also earned wage income during 2010. This suggests as is the case for many other tax assistance providers that low- to moderate-income entrepreneurs are often operating businesses to help fill household income gaps left by underemployment. Most Common Business Types (Only for Self-Employed Taxpayers) Retail Trade Janitorial Consultant Day Care 6% 10% 10% 20% Real Estate Staff estimate that about half of the business owners they served were committed to and focused on growing their businesses, while the other half were earning self-employment income from ventures 0 5% 10% 15% 20% pursued alongside full or part-time employment with no intentions of growing their operations. StartZone staff also estimate that about 10% of their Schedule C filers this year those who had been issued Form 1099 MISC were actually misclassified employees. Misclassified employees are those who are not actually self-employed, but are treated as independent contractors by their employers and thus become responsible for paying self-employment taxes. Thirty-one percent of the taxpayers that came to StartZone this year had received tax assistance there the year before. Of those return filers, about 36% increased their adjusted gross incomes from the year before, which suggests the potential for business growth when tax preparation leads to tax compliance and an improved understanding of business finance. Impact StartZone s Business Tax Center volunteers and staff Adjusted Gross Incomes helped filers better understand their business finances, (Only for Self-Employed Taxpayers) learn about their compliance responsibilities and take advantage of tax credits like the Earned Income Tax 7% Credit (EITC), Child Tax Credit (CTC) and Making 7% 22% Work Pay Credit (MWP). As it turns out, the largest direct federal support for microbusinesses comes 8% not through federal credit programs, like SBA or the CDFI Fund, but through the tax code. Each year, lowincome self-employed tax filers claim over $6 billion in EITC refunds, making this tax credit the largest direct 22% federal support for microbusinesses. About 32% of the self-employed filers served at StartZone qualified for 35% the EITC, and the average refund amount was $2,090. Other tax credits injected additional income into these businesses, and this year 45% of the self-employed filers received the $400 MWP 1 tax credit while another 15% received an average of $1,075 in the form of a CTC. 5% Under $5,000 $5,000-$15,000 $15,001-$30,000 $30,001-$40,000 $40,001-$50,000 Over $50,000 Page 4 Community College Microbusiness Development Program & Tax Initiative Innovation at StartZone
In addition to helping filers prepare their 2010 taxes, StartZone volunteers were committed to helping Schedule C filers by providing back office business support through their Turnkey Back Office program. This program was designed to match accounting student volunteers, supervised by Nigam, with small business owners for assistance in designing, installing and using simple business management systems to help keep them in compliance, make future tax seasons less stressful and help them stay organized and track income and expenses. StartZone, as a microenterprise development program, also offered a variety of other services to help community members successfully launch and grow their businesses workshops, business plan writing clinics, business ESL classes, targeted sessions to help business owners with marketing and operations, networking opportunities and connections to business mentors. Nevertheless, only about 5% of the 60 self-employed taxpayers actually attended any business trainings during the tax season. Lessons Learned Working with Student Volunteers The greatest value StartZone was able to gain from its relationship with the community college was access to accounting student volunteers. Three of the five volunteers at StartZone were either current students or recent graduates of Highline Community College. Students made good volunteers because they were already computer literate and software savvy, so learning how to operate new a tax preparation program was easier. Also, students are eager and willing to learn and to engage in volunteerism, particularly when it increases their marketable skills. The accounting students from Highline Community College were enthusiastic and shared positive attitudes and energy with the self-employed taxpayers at StartZone. At the same time, young student volunteers can also present unique challenges as Schedule C tax preparation volunteers. The manager of the Business Tax Center found that in spite of their enthusiasm and eagerness, many first- or second-year students struggled to grasp Schedule C preparation and often required much more close supervision than older students and non-student volunteers from the community. As firstand second-year community college students, some of these volunteers were still maturing and may have lacked a certain amount of confidence and comfort when it came to customer service. The students also were very uncomfortable with providing back office business support. Many became overwhelmed with the responsibility of helping self-employed filers design new systems for organizing their finances, which made the Turnkey Back Office program suffer in its first year. Though these challenges were partially mitigated by having a knowledgeable, responsible and accessible direct point of contact for the students on site to guide them and to review their work, the staff are considering seeking additional student volunteers from nearby four-year universities in the future, with the expectation that older students may be more confident and selfdirected tax preparers. Challenges in attracting a greater volume of self-employed taxpayers Marketing and outreach was a major challenge for StartZone this year. StartZone staff worked steadily to develop new relationships with community and trade organizations that serve individuals who might require small business tax assistance. However, they were unable to recruit business owners from these sources and noted that their clients came from within their established asset-building network. StartZone staff will analyze their marketing and outreach activity this year, identify where improvements can be made and apply lessons learned from other programs that have learned how to attract larger numbers of filers. They have already begun to explore alternatives that might bring in more taxpayers in the future. For instance, they plan to explore the possibility of developing a partnership with the local Volunteer Income Tax Assistance (VITA) campaign which offers free tax assistance to any income earning individual, not just the self-employed in which a VITA site would be located at Highline Community College. Staff expect that a VITA site on campus would bring more traffic to the community college and thus more self-employed taxpayers through their doors. Community College Microbusiness Development Program & Tax Initiative Innovation at StartZone Page 5
With greater scale, StartZone could garner more attention, more easily take advantage of the community college s resources and provide a more comprehensive learning opportunity for students all of which could help further enhance the capacity and community impact of the program. StartZone found that accessing the community college s resources was more difficult than they expected and that maintaining a partnership with accounting faculty requires more time and effort than they originally anticipated. StartZone has learned that faculty must become familiar with the value of volunteer tax preparation for students before they will become champions of the program. Because all of StartZone s student volunteers indicated that it was a valuable learning opportunity that applies directly to their studies in accounting, there is substantial anecdotal evidence about the program s impact that can be shared with faculty. In the future, it will be important for StartZone staff to more effectively communicate the significance and applicability of students volunteer experiences with community college faculty and staff. Additionally, a greater volume of taxpayers would guarantee a more thorough, repetitive learning experience for student volunteers and more positive outcomes from the program that can be widely communicated across the community college. Even though tax assistance volunteers receive training and certification before beginning to work with clients, volunteers learn most by practicing with taxpayers. Increasing the number of taxpayers that enroll in StartZone s business support services Engaging self-employed filers beyond tax assistance is easier said than done. Even though StartZone offers tax assistance services in the same location in which small business development workshops and other programs are offered, convincing self-employed taxpayers to take advantage of those services requires more than simply notifying them that wrap-around support is available. For the future, StartZone plans to investigate the behavioral economics research that examines best practices for encouraging take-up of highvalue services, like business management training. Conclusion During this tax year, StartZone staff faced critical challenges as they worked toward their goals of increasing taxpayers served, reaching more businesses in the informal economy and engaging more self-employed filers beyond tax time with additional services. Moreover, a very core piece of their model, seamless integration with the community college, remains a work in progress. Second, StartZone staff s marketing and outreach strategies did not produce the results they expected and they were unable to capture a much larger volume of taxpayers than the previous year. StartZone is working to improve these two elements by learning from the lessons of this year and best practices in the self-employment tax preparation field around building effective strategic partnerships with a community college and conducting effective marketing and outreach. Despite these challenges, StartZone provided free, high-quality tax assistance to each self-employed taxpayer they saw during the 2011 tax season, offered valuable applied learning opportunities for the student volunteers and are now thinking critically about creative ways to reinvent their marketing, outreach and partnership strategies in the coming years in order to serve even more taxpayers and educate even more students. Page 6 Community College Microbusiness Development Program & Tax Initiative Innovation at StartZone
CFED recognizes the commitment of the Seattle Foundation to small and growing businesses and is grateful for their support of the Self-Employment Tax Initiative. About CFED CFED expands economic opportunity by helping Americans start and grow businesses, go to college, own a home and save for their children s and own economic futures. We identify promising ideas, test and refine them in communities to find out what works, craft policies and products to help good ideas reach scale, and develop partnerships to promote lasting change. We bring together community practice, public policy and private markets in new and effective ways to achieve greater economic impact. For more information about SETI, our partners and our programs during the 2010 tax year, contact us at seti@cfed.org. Community College Microbusiness Development Program & Tax Initiative Innovation at StartZone Page 7