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The Inclusive Economy
U.S. Tax Code as a Gateway to Financial Security
By Sarah Schaefer on 05/19/2011 @ 11:30 AM
Myth #4: Lack of capital is the entrepreneur’s primary barrier to successful business development
Small business owners must overcome a number of challenges in their first few years. The complexity and high cost of paying taxes as a self-employed person is a major, and often overlooked, barrier to success for new entrepreneurs. New entrepreneurs who file their business taxes using a Schedule C may not be aware of what taxes they owe and when they owe them.
For example, the self-employed are required to estimate and pay their payroll taxes on a quarterly basis, which is especially tough for new business owners who may not be able to predict their how much profit they will earn; therefore, they do not know how much they will owe in taxes. Additionally, the self-employed are required to pay both the employer’s and the employee’s share of payroll taxes, which can be especially burdensome for new businesses that are not yet on stable financial footing.
To make matters worse, if the self-employed fail to pay these taxes on a quarterly basis, they may face expensive tax arrearages and late penalties.
Because their tax responsibilities are complex, many small business owners may seek assistance from a commercial tax preparer at a cost that CFED estimates to be between $300 to $500 per tax return. Not only is this a very high cost for many new businesses to pay, but it means that new business owners do not learn from the tax preparation process.
CFED’s Self-Employment Tax Initiative (SETI) views the complexity of the tax code as a learning opportunity: by providing free or low-cost tax preparation services for low-to-moderate income entrepreneurs, we can teach hundreds of business owners about their tax liabilities and the financial position of their businesses. Offering affordable, quality tax preparation services for low- and moderate-income sole proprietors can make the tax interface less intimidating, especially for first time filers.
Additionally, the “tax prep moment” provides a perfect opportunity to talk with business owners about how to overcome other challenges they face, such as limited access to capital and insufficient collateral to take out loans.
With the right help navigating the complex tax code, self-employed individuals can start and grow businesses that create long-term financial sustainability for them and their families.
Check back tomorrow for the final installment in our National Small Business Week blog series, where we explore the final myth of entrepreneurship.
National Small Business Week, May 16-20, 2011, celebrates the contributions of small businesses to the economic well-being of America. CFED would like to thank our sponsor, Sam’s Club Giving Program for its commitment to help start and grow small businesses and for its support of the Self Employment Tax Initiative. To find out more about National Small Business Week, click here. To find out more about how Sam’s Club is helping small businesses, click here.
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