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Can a self-employed Notary Public whose Schedule C income is exempt from SE tax contribute to a Solo 401(k)? The ProConnect software doesn't allow adjustment of income.

Level 1
On Schedule SE, the net profit as a notary exempt from self-employment tax equals the Schedule C net profit. Under this scenario, the software doesn't allow an adjustment/deduction for any type of retirement plan. When the exemption for SE tax is removed, it does. My conclusion is either the tax code doesn't permit retirement plan contributions for self-employed income exempt from self-employment taxes or there is an error in the software (note, 2019 and 2020 tax years produce the same result). I've researched online and found no information related to this issue except for another software package that wouldn't allow the retirement plan deduction for pre-tax contributions. Any help would be appreciated.
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16 Replies 16
Level 15
Level 15

I just tried one and added a SEP contribution, worked fine.

What type of retirement contribution are you trying to include?  nevermind I see it in your title, sorry...I just couldnt see the whole title when I was in the post.

Solo 401K seems to work fine as well.   Either a ProConnect bug or your client does not qualify for some other reason?

Note : I use ProSeries not ProConnect


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
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Level 1

Thanks, Lisa.

That's good to know. So...it appears that self-employment income not subject to self-employment tax would still qualify for contributions to self-employed retirement plans. 

Therefore, it must be a bug in ProConnect since the software allows the contribution/deduction when the self-employment tax exemption is removed. 

 

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Level 15
Level 15

Let me see if I can tag someone familiar with ProConnect, maybe they can help.

@itonewbie 

@George4Tacks 


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
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Level 15
Level 15

Theres also a Facebook Group for ProConnect that has 2000 members, you may find help in there quicker (if you do FB).

https://www.facebook.com/groups/proconnectax


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
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Level 11

Mobile Notaries must carefully itemize notarial versus non-notarial fees from loan signing assignments. If you are a self-employed Notary Signing Agent, IRS Publication 17 states that you must pay self-employment tax if you had net earnings of $400 or more from fees for services other than notarizing documents (for example, traveling to a signer’s home, delivering completed loan document packages, etc.). Any income falling into this category must be declared on an IRS Form 1040, Schedule SE for self-employment tax purposes.

https://www.nationalnotary.org/notary-bulletin/blog/2015/02/five-tax-tips-for-notaries#:~:text=If%20....).

Level 11

Remember you are dealing not just with IRS but with the Department of Labor; and probably with a Master Plan written by some bank or other trustee.  The plan document probably refers to income from a "trade or business," while a notary is a public official.  I wouldn't risk it, for the small deduction that is probably involved, without some kind of positive guidance from IRS or DoL.  

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Level 15
Level 15

Its pretty easy to keep track of, you only record your notary fees in your journal, not travel or extras.

I have an attorney that saves quite a nice chunk of SE taxes on his Notary fee income.


♪♫•*¨*•.¸¸♥Lisa♥¸¸.•*¨*•♫♪
Level 11

You live in California.  In the real world, notaries don't make that much money.  

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Level 1

Thanks, Bob.

Are you recommending not risking the exemption for self-employment taxes for notarial fees?

In this case, my client started a mobile notary service this year and has been doing mortgages/refinancings 24/7 here in California. She is on track to book six figures in revenue. As I understand it, she gets paid a $10 or $15 notarial fee for each document that has to be signed, and this makes up most (if not all) of her income. Notary Gadget, the notary specific bookkeeping software she's using, indicates that all of her Schedule C net income is exempt from SE taxes. I have not reviewed her invoices in detail yet, but if the client payments were indeed for notarial fees (and not travel, etc.), wouldn't this qualify for the exemption?  

Also, related to my initial question, ProConnect doesn't allow a solo 401k (or any other self-employed retirement plans) pre-tax contribution deduction for any of the Schedule C income exempt from SE taxes. When I remove the exemption, it does. In ProSeries, Lisa was able to make the solo 401k adjustment to income with the SE exemption. So, the problem appears to be a bug with ProConnect and not a limitation of the tax code?

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Level 11

@davenport72 

Are you recommending not risking the exemption for self-employment taxes for notarial fees?

I’m recommending you think about that. If it looks like a can of worms and quacks like a can of worms, it's probably not a duck.  Also, when she's in a car accident that leaves her disabled, she's going to be asking you why her Social Security benefits are so low.  Not to mention CASDI.  I wonder how the new California "independent contractors are now employees" law works with notaries.  Is there an exception?

She is on track to book six figures in revenue. As I understand it, she gets paid a $10 or $15 notarial fee for each document that has to be signed, and this makes up most (if not all) of her income.

So she notarizes 800 or so documents a year? I suppose that’s possible if there are multiple documents per call and maybe two signers and she gets paid for each. They pay her the same whether the customer is next door or 10 miles away?  Usually, signing a deed of trust that has to be notarized also requires signing a note and escrow instructions, which do not.  She does those for free, just to get the notary work?  See what I mean about the can of worms?

Also, related to my initial question, ProConnect doesn't allow a solo 401k (or any other self-employed retirement plans) pre-tax contribution deduction for any of the Schedule C income exempt from SE taxes. When I remove the exemption, it does. In ProSeries, Lisa was able to make the solo 401k adjustment to income with the SE exemption. So, the problem appears to be a bug with ProConnect and not a limitation of the tax code?

Or, there may be a bug with ProSeries, and ProConnect has it right.

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Level 13

"Are you recommending not risking the exemption for self-employment taxes for notarial fees?"

Exempt from SE = not self-employed earnings that qualify for the retirement plan, and these fees are easily seen by examining the ledger where everything gets recorded. Non-exempt income would qualify. Separate Fees from the rest of the activity.

If there is nothing other than the exempt fees, you would not need to use Sched C at all: "If you had no other income subject to SE tax, enter "Exempt—Notary" on Schedule 2 (Form 1040 or 1040-SR), line 4. Don’t file Schedule SE."

Or, you will be removing the Fees from the Business income reported on the SE: "However, if you had other earnings of $400 or more subject to SE tax, enter "Exempt—Notary" and the amount of your net profit as a notary public from Schedule C on the dotted line to the left of Schedule SE, line 3. Subtract that amount from the total of lines 1a, 1b, and 2, and enter the result on line 3."

For this: "On Schedule SE, the net profit as a notary exempt from self-employment tax equals the Schedule C net profit. Under this scenario, the software doesn't allow an adjustment/deduction for any type of retirement plan."

You are stating the Sched C business (when you exclude these Fees) has a loss, then; only the Notary fees are passing on to the Sched SE? That means there is nothing for a retirement plan contribution. They do not qualify.

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"Level Up" is a gaming function, not a real life function.
Level 1

Appreciate all the responses. However, I think I'm more confused than I was at the beginning. Let me try again.

I have a client who is an independent loan signing agent operating as a sole proprietorship. She will receive 1099s from the companies who contracted her to do the loan signings. She uses bookkeeping software to track her signing income and business expenses. This produces net income that:
 
1. Should be reported on Schedule C? 
2. Then, exempt net profit as a notary public should be indicated on Schedule SE?
3. If the net profit on Schedule C is most or all of her exempt net profit on Schedule SE, is the amount of net profit exempted from self-employment taxes ineligible to be used in self-employed retirement calculations as ProConnect doesn't allow the adjustment to income for Solo 401(k), SEPs, etc.?
 
Or am I completely missing something? And perhaps should consider another career?
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Level 13

1. If the only thing she does is the Notary fees, there is no Sched C business, because she is a not running a business:

 "If you had no other income subject to SE tax, enter "Exempt—Notary" on Schedule 2 (Form 1040 or 1040-SR), line 4. Don’t file Schedule SE."

2. If there is a combination of income types, you use Sched C for the Sole Proprietorship with the notary income, and then show it is the exempt component on Sched SE:

"you must pay self-employment tax if you had net earnings of $400 or more from fees for services other than notarizing documents (for example, traveling to a signer’s home, delivering completed loan document packages, etc.). Any income falling into this category must be declared on an IRS Form 1040, Schedule SE for self-employment tax purposes."

"However, if you had other earnings of $400 or more subject to SE tax, enter "Exempt—Notary" and the amount of your net profit as a notary public from Schedule C on the dotted line to the left of Schedule SE, line 3. Subtract that amount from the total of lines 1a, 1b, and 2, and enter the result on line 3."

If the Sched C ends at the same amount as the Notary Fee income, then you have nothing subject to SE and no earned income that qualifies for retirement. Notary fees are paid to her as a Public Official. For there to be participation for Business retirement, you would need to have business income.

https://www.irs.gov/retirement-plans/self-employed-individuals-calculating-your-own-retirement-plan-...

"You calculate self-employment (SE) tax using the amount of your net earnings from self-employment and following the instructions on Schedule SE, Self-Employment Tax. However, you must make adjustments to your net earnings from self-employment to arrive at the amount of "plan compensation" to use to determine the plan contribution/deduction for yourself."

Answer to this: "is the amount of net profit exempted from self-employment taxes ineligible to be used in self-employed retirement calculations"

is Yes, it does not qualify. It's Exempt from SE because it is Public Official fees and not Earned Income.

Here is a topic for examples of what a Partnership would use for Earned income vs income:

https://www.irs.gov/retirement-plans/retirement-plan-faqs-regarding-contributions-what-is-a-partners...

 

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"Level Up" is a gaming function, not a real life function.
Level 11

@davenport72 "Or am I completely missing something? And perhaps should consider another career?"

I hear mobile notaries make good money.

Level 1

@BobKamman Nice! Got a good chuckle out of that one. 

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Level 15

@davenport72  I won't get into the technical discussions since those are already well covered.  I will, however, focus on how the entries should be made in PTO, which doesn't have a bug in this particular calculation.

The proper way to make the input for exempting notary fees from SE-tax is not on Sch C but Sch SE.  You should, therefore, prepare Sch C as you usually do.  The next step is to make an adjustment on Sch SE and you do so by making the input on the line "Exempt net profit as a notary public" under Taxes > Other Taxes > Self-Employment Tax (Schedule SE).

This way, the adjustment will not impact the limits for retirement contributions but show up as a notation on Sch SE, to reduce the amount reported on Line 2 for Line 3.

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