SETI
Startup Businesses Drive
American Job Growth
Why Leverage Tax Time to Reach and
Support Low-Income Startup Businesses?
Small Business Defines the American Economy and Generates Jobs
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.
Job growth in the United
States is driven almost entirely
by business startups, and tax
season is the best time to
identify, reach and offer support
to the 9.8 million self-employed
individuals operating startup
businesses in this country.
nOf the 27.5 million businesses in the United States, 99.9%
are defined as small businesses with fewer than 500
employees.
n9.8 million self-employed individuals – nearly two-thirds
of all self-employed people – are operating business
startups: unincorporated businesses less than five years
old that are still in their developing stages and feature just
one employee, the business owner himself.
nWithout business startups, there would be no net job growth in the U.S. economy. Startups in their first year of
existence create an average of 3 million jobs per year. On average in a given year, about one third of the annual
job creation rate is a result of startup businesses.
nThe notion that businesses bulk up and create more jobs as they age is, in the aggregate, not supported by data.
Nearly all net job creation since 1980 has occurred in small business startups less than five years old.
Tax Season is the Best Time to Reach Business Startups
Every business startup must pay business-related taxes. This makes the tax preparation process a built-in,
structured opportunity to reach out to startup businesses and provide them with access to business development
and asset-building services.
nAnnually, roughly 15% of all U.S. taxpayers – some 20 million people – file a Schedule C return. The Schedule C
form, filed with a Form 1040, is used by sole proprietorships to report their earnings and expenses.
nOn average, first-time filers make up about 10% of all Schedule C filers each year. For these 1.6 million or
so first-time filers, the first encounter with business tax preparation is both intimidating and, consequently, a
powerful teachable moment. Given how critical the business startup process is to net job creation, it is sadly
inefficient to waste such a valuable and scalable intervention opportunity.
1200 G Street n Suite 400 n Washington, DC 20005 n 202.408.9788 n www.cfed.org
Helping the Self-Employed File Taxes Builds Economic Security for American Families
Providing free or affordable business tax preparation services to low-income self-employed individuals builds
businesses and promotes asset-building for low-income households. By paying an affordable fee, or no fee at all,
to have their business taxes prepared by trained preparers, self-employed individuals can save money and ensure
that they access all the tax credits for which they are eligible.
nAccording to an IRS study, nearly 72% of Schedule C filers used a paid preparer. When new startup businesses
use expensive paid preparers, the challenge of filing business taxes for the first time becomes as costly as it is
confusing, and those who use commercial preparers may still walk away without a solid understanding of the tax
process.
nMore than 13 million self-employed individuals – or 59% of all Schedule C filers – earned less than $50,000 in
adjusted gross income (AGI). These filers, in particular, can benefit from saving money on tax preparation and
accessing refundable tax credits.
n6 million Earned Income Tax Credit filers – or 24% – also reported self-employment income. In total, these 6
million self-employed EITC filers received credits amounting to more than $36 billion.
The Self-Employment Tax Initiative: Growing Businesses and Building Economic Security
Unlike other microenterprise development programs, SETI focuses on the tax code and the annual tax
preparation process as the primary outreach mechanism for startup businesses. The reason is simple: nearly
every single business startup must formalize its existence as a business through the tax filing process. Early
microenterprise development strategies typically focused on micro lending and business training and counseling.
While only roughly 10% of unincorporated small businesses seek microloans in the startup phase, nearly all must
pay business taxes. SETI has taken advantage of this complementary outreach strategy, recognizing that the tax
season is an ideal time to reach a larger pool of self-employed individuals and provide them with access to products
and services that will help them grow their businesses and build financial security.
nSETI awards grants to community-based organizations that offer free or affordable tax preparation assistance
to low-income, self-employed individuals. To date, SETI has partnered with 41 organizations across the country,
awarding over $500,000 in grants. These local partners help SETI identify, test and refine promising practices for
using the tax filing process as a means of fostering small business development.
nSETI conducts research and facilitates field-building among our local partners to identify optimal ways to
serve self-employed people. SETI collects and disseminates lessons learned from local partners that explore
sector-specific strategies for business support, outreach and delivery strategies that promote access by
underserved populations, and strategies for serving entrepreneurs beyond the tax season with asset-building and
microenterprise services.
nSETI promotes sound tax policy as it relates to the self-employed. SETI engages with policy partners to
help analyze, understand and test the boundaries of self-employment tax policies. At the national level, SETI
works with the Aspen Institute, the National Association for the Self-Employed, the Association for Enterprise
Opportunity, the National Community Tax Coalition and the IRS Small Business & Self-Employment Division.
At the local level, our partners in both the microenterprise and the free tax preparation fields are important
participants in this policy dialogue.
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.
SETI gratefully acknowledges the support of our funders: Capital One, Citi, Bank of America, Sam’s Club, The Annie E. Casey Foundation,
The Walmart Foundation, Morgan Stanley, the Northwest Area Foundation and Charles Schwab Bank.
1200 G Street n Suite 400 n Washington, DC 20005 n 202.408.9788 n www.cfed.org