Updated 11-1-19. Did you know that for small business owners such as independent Notaries, December 31 is just as significant a day for tax purposes as April 15? It’s true!
This is because tax planning — a lot of which should be done or at least considered before the end of the year — is just as important as tax compliance (otherwise known as filing your tax returns).
Here are 3 tax planning tips for Notaries to consider before December 31. Of course, everybody’s tax situation is different, and nothing written below should be taken as tax advice, but rather as ideas you can take to your tax advisor to see if they make sense for you and your Notary business. This article is strictly for informational purposes.
1. Set Up A Retirement Plan Through Your Business
Many small business owners think that because they aren’t employed by a big company, they are no longer eligible to stash away money in retirement accounts that can save them big at tax time. This is a myth as, in fact, small business owners often have more options available to them in terms of tax-advantaged retirement plans than employees of someone else.
A W-2 employee under the age of 50 can only stash away a maximum of $19,000 into a 401(k) in 2019 ($25,000 if 50 or older). At a 24% marginal tax rate, this comes out to a tax savings of $4,560 ($6,000 if 50 or older) if you contribute the maximum allowed.
A self-employed Notary under the age of 50, on the other hand, can stash away up to $56,000 into a 401(k) they set up through their business in 2019 ($62,000 if 50 or older). At a 24% marginal tax rate, this comes out to a tax savings of $13,440 ($14,880 if 50 or older) if you contribute the maximum allowed.
There are retirement plans other than 401(k)s that you can set up as well. However, some plans have to be set up before the end of the year, so be sure to start talking with your advisor now to see if setting up a retirement plan for your Notary small business makes sense!
2. Hire Your Kids
Do you have children? Consider hiring them to help you in your business.
This can be a great tax strategy because, thanks to the new tax bill passed in late 2017, you can pay each of your children up to $12,200 a year, and this money will be tax-free to them, while your business gets a deduction for what you pay them.
Of course, you can’t pay your child $12,200 a year for filing papers a few hours every month; the wage you pay them has to be what you would pay them even if they were not related to you.
It’s also crucial to remember that Notaries handle sensitive information, so there are certain things your children will not be able to help out with unless they are also commissioned Notaries. That being said, if you have adult children who have received their Notary commission — or are open to becoming commissioned — this could be a great tax-saving strategy. For example, college students home on break could take on part-time Notary work for you.
There are also tasks for your children who aren’t commissioned. They may be able to help with administrative tasks like printing out Notary certificates and scheduling appointments. They could also assist with your business’s marketing efforts, including social media and community outreach events.
Paying your children can be an effective way to shift income from someone in a higher tax bracket (you) to someone in a literally 0% tax bracket and still keep the money in the family.
Your child could then contribute this money into a Roth IRA, which could grow tax-free throughout their lives or perhaps be tapped into to pay for their college education.
The end of the year is a great time to talk with your kids about working for your business in the new year.
3. Set Up A Business Entity For Your Notary Service
If you don’t already have an entity set up, the end of the year may be a good time to get the paperwork filed so that you can begin the new year earning income solely in your business entity rather than in your own name.
Why would you want to do this? It could save you on taxes.
For most people, all small business income they earn that is paid directly to themselves as individuals is subject, to some degree, to the self-employment tax (in addition to regular income tax). However, if you make money in your business entity rather than as an individual, you can possibly avoid paying self-employment tax on a portion of your business’s earnings.
This is just one example of ways that a business entity can save Notary business owners money.
Of course, setting up an entity for tax purposes doesn’t make sense for everybody, and it also has legal ramifications, so be sure you consult with qualified advisors before making any moves.
Again, it should be stated that this article is intended for informational purposes only and not intended to be taken as tax advice. Always consult with qualified tax and legal counsel.
Logan Allec is a CPA and personal finance blogger at Money Done Right, where he blogs about awesome ways to make money — like being a Notary!