Posted by JustANotary on 8/26/11 12:07am
Msg #395049

Self Employment Tax exemption argument...

Take the average signing, I print docs, & I travel to the borrower, I go over the docs, have them sign & I notarize some of the documents. If I charge $150 & notarize 10 documents, I have $100 in notary income and $50 in travel & printing fees. We will say I average $40 in expenses & mileage deductions for my signings. The IRS is showing I pay .666 times the total income times the SE tax rate (about 15%).

But what was my expense to stamp the paper? To be a notary, you pay for commission, bond, insurance, notary classes etc, but most of the expense on the average signing is for printing the documents & the mileage expense to get to the signing. I say very little of a notaries expenses are to be allocated to the notary fees, almost all of the expenses are to print the documents & drive to the location.

So I would argue that the $100 in notary fees has almost no expenses associated with it, but the $50 in travel fees had lots of expenses associated. The notary fees would be close to 100% exempt, and the trip & printing fees would be largely offset by the cost of traveling & printing the documents.

Reply by mwm143 on 8/26/11 8:54am
Msg #395062

I'm guessing the IRS doesn't agree with you.

My understanding is fairly black and white:

$150 closing fee subject to business expense

-$100 in notarization fees exempt from SE taxes

= $50 subject to SE taxes.

Reply by JustANotary on 8/26/11 9:46am
Msg #395069

Re: I'm guessing the IRS doesn't agree with you.

But you pay SE tax on net, not gross. The IRS instructions on how to calculate SE tax make that quite clear. So you can take out the expenses, what is not clear is how you take out the expenses.

Reply by mwm143 on 8/26/11 10:13am
Msg #395077

Re: I'm guessing the IRS doesn't agree with you.

I think you're thinking too hard on this. Income less expenses. Determine total income first then deduct expenses to get net income. Pay SE taxes on net income.

If you're notarization fees are higher than the total closing fee then I don't know if you can carry that over to the next closing. Seems like a gray area. Good luck.

Reply by Glenn Strickler on 8/26/11 11:08am
Msg #395094

You pay SE tax on gross, not net .........

that's the problem you are having.

You have had a job where you have gotten a paycheck, right? SE tax is nothing more than both halves of the Social Security withholding. When you work for someone, you pay half, your employer pays half. When you are self employed, you get to pay both halves.

If you have had a job where you get a paycheck and still have a stub, pull it out and you will find the SS withholding is computed on your gross wages. If your tax professional is telling you otherwise, then you might want to shop around for a new tax professional. You problem seems to stem from the idea you have that SE is paid on net. Not the case.

Just a thought, I have always done my own taxes. Obviously for many of those years, I did it by hand because there were no pc's to use but I have used a computer tax program since they have been on the market. I personally use H & R Block which was Tax Cut because it's was the first one I bought. Many of my friends use Turbo Tax and have been happy with it. Over the years, I have had income that was subject to SE tax. During that time, I have also been audited several times, but the IRS never questioned the manner in which the tax program calculated the SE tax exemption.

Reply by Glenn Strickler on 8/26/11 11:20am
Msg #395098

I should have said ...

I should have also stated that it issue seems to be how you are figuring your gross. Notary business is different from your own business where you should be taking a paycheck from the business and the SE tax is figured on your gross, not your business's gross. As far as notary work, the computer asks if any income is from notary work. You answer yes, then it asks you to enter the amount of income from notary fees. Obviously in CA, that would be 10 dollars per stamp. However, when I was audited, I had to show how I calculated the exempted amount. The way you calculate the amount must be in such a way that you do not claim a higher exemption for a job than you actually were paid for that single jot.

In other words If I do a job that pays $150. It has five documents that require a stamp, so I can exempt $50 from that one job.

OK then I take a job for $75. However when I get there I find that 10 documents need notarization. But since your fee for that job was only $75, that is all you can exempt from SE tax even though technically, you would have been paid $100 had you done each document individually.

If you figure it any other way, the IRS will not agree. So look at how you keep your books and can show the relationship between notary fee and total fee for each job.

Reply by taxpro on 8/26/11 12:00pm
Msg #395112

SE Tax Exemption

SE Tax is paid on net income, not gross income. And if you are a sole proprietor, you do not take a "paycheck" from your business. You and your business are the same. Whatever amount your business makes in terms of net income equals your taxable net income, no matter how much you "take" from the business account.

I agree that you must keep track of notary fees and show a reasonable basis for your calculation, but your expenses must be allocated among SE exempt income and SE taxable income.

Reply by Glenn Strickler on 8/26/11 3:06pm
Msg #395179

Re: SE Tax Exemption

Well the actual calculation can be different for everyone and can be complicated. The problem here is notary and other income are trying to be mixed in one pot and the IRS will not let you do that. You can only exempt income earned by performing the notary act itself. Here in CA, it's $10 per act. Some states, it's only a few dollars allowed or less. Travel fees and expenses must be figured separately and that is what the tax program does.

I was attempting to pass on what I learned from several audits since I have been doing notary work. I originally began keeping records in the manner PAW (God Rest Him) advised me when I first began posting on this forum, and I have been told by more than one IRS agent that is the correct way to keep records. I have only used a tax program since I have been a notary, so I don't know the calculation that would be necessary if I did my taxes all on paper forms. The way Tax Cut has calculated the SE tax has never been called into question.

As far as taking a paycheck, a many people who were sole proprietors in California, incorporated in Nevada and take a paycheck under those circumstances and still remain the only employee of their "corporation". The corporation withholds the employers part and then the "employee's part" is taken out of the "paycheck". That SE tax is paid on that gross income. Anyone has any questions on that, I can recommend an attorney who arranges just that setup.

Reply by JanetK_CA on 8/27/11 4:15am
Msg #395242

Re: SE Tax Exemption

Re: your last paragraph, Glenn, I think it works differently for sole proprietors, which most of us probably are. (Just a guess... )

Reply by desktopfull on 8/26/11 1:09pm
Msg #395144

Consult an accountant. n/m

Reply by BrendaTx on 8/26/11 9:58am
Msg #395071

The SE Tax exemption has nothing to do with signing agent work. It only applies to allowable notary fees.

Based on you scenario, this is the way that I would estimate your obligation to the IRS.

$150 total for a job.

$100 is in notary fees alone---not subject to SE tax.

$50 for other signing agent activities--only the $50 is subject to SE Tax.

$50 minus $40 offset for expenses = $10 net profit (for the purpose of figuring SE Tax obligation).

$10 x 15% = $1.50 in SE Taxes on that job.

I'm not an accountant or tax preparer.

Reply by BrendaTx on 8/26/11 10:04am
Msg #395074

Read IRS pub about SE Tax

http://www.irs.gov/pub/irs-pdf/i1040sse.pdf

Reply by JustANotary on 8/26/11 10:26am
Msg #395082

That is how my CPA calculated it. That is not how my auditor is calculating it...

Reply by Doris_CO on 8/26/11 10:02am
Msg #395073

The expenses are deducted on your Self-Employment schedule C income. If you were not a notary public then you would have to pay Self-Employment tax (Schedule SE) on the entire net profit from you business. As a Notary Public you are allowed to deduct the Notary Public fee you can charge in your state from the net profit before computing the Self-Employment tax. You seem to be making this way more complicated then it really is.

Reply by Les_CO on 8/26/11 10:07am
Msg #395075

Personally I don’t bother, but I’m not in CA. I’d bet at least some of you may someday wish you had paid in those SE taxes you are trying so hard to avoid. JMO

Reply by BrendaTx on 8/26/11 10:15am
Msg #395079

I pay mine, Les....

It is not worth it to not pay them for me.

Reply by Philip Johnson on 8/26/11 11:19am
Msg #395096

What would make me wish I had paid those SE taxes?

I'm already vested in the system with over 35 years of payments in to the Soc. Sec. system. I also have FICA payments taken out of my other income, so why not take advantage of the tax code on this source of income?

As well I take those "savings" and invest into a 401K that will pass on to my survivors, rather then dying with me like social security. Everyone has to make their own decisions and for one not to do the math and work it to their best advantage is rather foolish on their part.

Reply by taxpro on 8/26/11 12:02pm
Msg #395114

I agree, Philip..... n/m

Reply by Les_CO on 8/26/11 12:08pm
Msg #395118

Re: What would make me wish I had paid those SE taxes?

Please note I said “some of you.” Obviously in your case and maybe Warren Buffet’s, such advice is unnecessary. But have you read some of these posts pertaining to this subject the last couple of days?

Reply by John Tennant on 8/26/11 10:33am
Msg #395086

JustANotary, your example of trying to separate SE from regular taxation on a single job will never pass the IRS requirements.

Why? Expenses are calculated on an annual basis consisting of your actual paid costs, not on a job by job basis.

Example: $10,000 total income, less total paid expenses, = net regular taxable income.

Documenting the actual Notary fees will give you the amount of $ that is exempt from SE taxes.

Example: $10,000 total income, less $2,000 in Signing Fees = $8,000 of total income that will be taxed for SE.

As an Enrolled Agent I often have to explain SE exemption to my clients.

Hope this helps

Reply by JustANotary on 8/26/11 10:44am
Msg #395089

The $8,000 is gross less the signing fees. The instructions for calculating the SE tax says to use the net. The question is, how do you calculate the net. The IRS is saying (for example) that of the $10,000 1/3 is expenses, so they figure $10,000 less $6,000 in notary fees leaving $4000 times 2/3 times the SE tax rate.

Reply by Calnotary on 8/26/11 10:55am
Msg #395091

Agree John but...

You said:

"Example: $10,000 total income, less $2,000 in Signing Fees = $8,000 of total income that will be taxed for SE."


The $ 2000.00 dollars of signing fees has to be NOTARIZATION FEES, so about 10.00 dollars here in CA.

So in other words and you tell me if I am wrong.

200.00 Signing fee

200.00 subject to Income tax Federal and State

100.00 Not subject to SE Tax because I did 10 notarization

And it's not at per signing basis, so at the end of the year when you have earned 100K(yeah right)

100K subject to income tax(before standard deductions,exemptions, itemized deductions,expenses in Sch C etc. etc)

And you will only pay SE TAX on 70K because you did 3000 notarization

Reply by John Tennant on 8/26/11 11:00am
Msg #395093

Re: Agree John but...

Yes, on an annual basis you are right. My term "signing fees" actually meant Notarization Fees.

Reply by John Tennant on 8/26/11 10:56am
Msg #395092

Your regular taxable net is your total annual gross sales, less total annual expenses. This is the figure you use for your personal tax obligation.

Example: $10,000 gross sales, less $6,000 cost of sales = $4,000 of regular taxable income.

SE tax is a separate tax.

SE tax is your total annual gross sales, less the actual fees charged for the Notary Signings.

Example: $10,000 gross sales, less $2,000 of signing fees (exempt from SE) leaves $8,000 in SE taxable income.

Reply by JustANotary on 8/26/11 11:19am
Msg #395095

I have read the SE instructions over & over again, and you pay SE tax on NET. It just is not clear how you calculate the net. The SE tax is not calculated on gross.

Reply by Glenn Strickler on 8/26/11 11:24am
Msg #395099

Check my post above ...

It's gross, not net. But you are not figuring it correctly as it pertains to your notary work. You don't figure it like a regular small business where you should be getting a paycheck from your business. The business doesn't pay it on it's gross, it's computed on what GROSS is paid to the employees ... That's where you are getting screwed up.

Reply by JustANotary on 8/26/11 11:31am
Msg #395100

Re: Check my post above ...

I am reading the SE instructions from the IRS, page 4 middle section, number 2; ""Enter exempt notary, and the amount of your net profit as a notary from Schedule C..."

Reply by John Tennant on 8/26/11 11:33am
Msg #395104

Re: Check my post above ...

Please check your PM's

Reply by Glenn Strickler on 8/26/11 11:38am
Msg #395107

Re: Check my post above ...

Well I understand that. It doesn't mean what you think it means. It only means what the IRS thinks it means. I have already been there, done that years ago. Since you are in California, you should be keeping your journal about the same way I do. The problem is in your bookkeeping. Take a look at my posts above .....

Reply by taxpro on 8/26/11 12:23pm
Msg #395120

Let's make it simple...

Allocate your expenses to your notary income and pay SE tax on the net.

Simplified Example:

Total gross income earned as a notary signing agent = $80,000
Amount from notary fees = $48,000 (60%)
Amount from travel, etc = $32,000 (40%)

Total expenses for mileage, supplies, phone, advertising, etc. = $20,000
Allocate 60% of expenses ($12,000) to notary income and 40% ($8,000) to other income.

Net income from notary fees = $36,000 - Exempt from SE Tax
Net income from other fees = $24,000 - Subject to SE Tax

Both are subject to income tax.

The original poster wanted to allocate most of his expenses to the "Other" income since the Notary income is already SE exempt. I understand his reasoning, but the IRS will not go for that because you have one business, and there is no way to separate the two functions. You can say that mileage and supplies should all be allocated to the "Other" income, but it just won't fly. You have to be a notary to be a notary signing agent. You have to print the papers that will be notarized, and you usually have to drive to meet with the signer. In general, the expenses are allocated on a pro rata basis.

By the way, I am an Enrolled Agent, and have been preparing taxes for more than 25 years.

Reply by Doris_CO on 8/26/11 12:33pm
Msg #395127

Re: Check my post above ...

"Posted by JustANotary on 8/26/11 11:31am

I am reading the SE instructions from the IRS, page 4 middle section, number 2; ""Enter exempt notary, and the amount of your net profit as a notary from Schedule C..."

I think I see where you are confused. The net profit on Schedule C has your notary fees included in it, but you don't have to pay Self-Employment taxes on your notary fees. So, you take the net profit from Schedule C, put that amount in your calculator and deduct the amount of your Notary Fees, which you should have kept for EACH job you have done over the entire year. The amount of net profit minus notary fees is recorded on line 2 of Schedule SE. You write "exempt notary" on the dots next to line 2 of Schedule SE. The Self-Employment tax is computed on the amount shown on line 2.

As a self-employed person, especially as a notary, you will need to have every fee you've charged documented and separated in columns on some sort of ledger or spread sheet, so you can back up all the numbers you're claiming.

Reply by JustANotary on 8/26/11 3:27pm
Msg #395183

I think we have several conflicting ways of figuring SE tax.

If I understand everything correctly (and when it comes to taxes, I am never sure of that...) I agree with Doris & John. Other notaries have said that they pay SE tax based on the gross, & TaxPro is figuring an alocation of the expenses between the notary fees & the other income "your expenses must be allocated among SE exempt income and SE taxable income"

The IRS auditor is calculating things they way TaxPro is doing it. I think the SE instructions say to do it the Doris & John are looking at it. I do not see any reason to pay on the gross as some notaries have said they are doing.

If I have miss quoted any of you, sorry, & please be kind. I have a business degree, but I struggle to understand how taxes work.

Reply by taxpro on 8/26/11 4:15pm
Msg #395192

Re: I think we have several conflicting ways of figuring SE tax.

You're right, if you are talking about business income reported on Schedule C as a sole proprietor, you pay SE tax on your net income, not the gross, and the portion attributable to notary fees is SE exempt. Allocating expenses amongst taxable and nontaxable income is a common accounting and tax principle, but may not be specifically explained in much detail in the SE instructions.

Glenn's explanation involved a more complicated method using a corporation, issuing paychecks from the corp, withholding federal and state income tax, social security and medicare tax, and having the corporation match the SS and medicare tax. SS and medicare tax are withheld on the gross income in that case, just like from any other W-2 job, and a W-2 is issued from the corporation to you. A separate corporate tax return must be prepared, and usually a state form of some kind, unless you're incorporated in Nevada or one of the states that don't require reporting. While notary fees are exempt from SE tax, they are not exempt from Social Security and Medicare Tax withholding if you are an employee of your corporation. That is a completely different situation from what you talked about, and this is probably not applicable in your case. Unless your income is very high, and/or you are well-versed on the laws regarding corporate tax return preparation, state franchise tax laws, payroll tax laws such as making payroll tax deposits, payroll tax quarterly reports, federal and state W-2 preparation, work comp laws, unemployment tax laws and labor laws, etc, and you have plenty of time on your hands or are willing to pay someone big fees to do it all for you, it's probably not worth the time or expense. If incorporated out-of-state, you also have to pay an annual fee to a registered agent there. IME, this is expensive and more trouble than it's worth, but the attorneys love it.

Good luck with your audit. They are a real PITA.