CA – SETI

April 4, 2011

California Self-Employment Tax Initiative

The CA-SETI is a part of a national strategy developed by CFED to reach large numbers of entrepreneurs during tax season who could benefit from business assistance and microloans. Learn more about the national strategy at CFED.

Filing the Schedule C is the single most important entry point for acknowledging and formalizing micro-businesses in the U.S., and it represents an opportunity to reach low and moderate income entrepreneurs who could benefit from business assistance, microloans, and in some cases from Earned Income Tax Credit or the Making Work Pay Tax Credit!

Right now, Micro Enterprise Development organizations (MDO’s) reach 1% of low and moderate income entrepreneurs in California. Additionally, business owners who operate in the informal economy could formalize their businesses and enter into the Social Security system.  California house an estimated 2 million low income and start-up self-employed businesses.  All of them must file taxes, but most have no place to turn for the comprehensive business tax preparation and planning assistance that they need to “get their businesses right.”

CAMEO conducted a four year CA-SETI  (originally three years) demonstration project from October 2007 through June 2011 (tax years 2007-2010).  The purpose of this project was to assist MDOs reach new customers during the tax preparation process, and in this way provide needed business assistance and financing to micro-business owners.

CAMEO is satisfied with the primary outcomes achieved by this four-year demonstration project.

  1. Significant numbers of new low income micro-business clients were served by MDO’s offering Schedule C tax preparation services.  The number of clients served went from 78 in 2007 to 3300 in 2010.
  2. Sixty percent of individuals who filed Schedule C via the VITA site, accessed business services at the MDO partner.
  3. Sixty percent of Schedule C filers are new filers, thus demonstrating that outreach is an effective way to formalize self-employment.
  4. Client businesses appear to increase their income as a result of participation: thirty-one percent of returning Schedule C clients increased their adjusted gross income. Fifty-eight percent of clients obtained the Making Work Tax Credit; seven percent ‘patch’ family income through self-employment and wages.

CAMEO intends to continue to partner with CFED on the advocacy efforts with the IRS and also continue to promote the SETI model as a viable marketing opportunity to MDO’s not only in California but nationally. CFED’s advocacy efforts are paying off; for tax year 2010 the IRS officially allowed Schedule C’s to be prepared at select VITA sites. To date (to our knowledge) California VITA sites are not among those officially sanctioned by the IRS; however, certain sites were able to obtain special approval while other sites were hampered by not being able to serve all businesses. The task for CA-SETI is to continue to demonstrate a successful model and support CFED’s advocacy work with the IRS to increase the scope of the VITA program in California to include Schedule C.  Informal and self-employment income is common in California, it is imperative that free tax preparation services increase so that formalized businesses are incorporated into the tax base.

CAMEO thanks Citi and CFED for their support of this innovative project.

Read the CA-SETI FY2010 Final Report.

The 2009 RFP and attachments