Tax Season Prep: What Notaries Need to Know

Introduction

Tips For Tax Season Preparation

1. Start With Choosing A Notary Accounting Software

   The first step of preparation should be the selection of a notary accounting software.Investing in a reliable notary-specific accounting software/CRM can significantly streamline your tax preparation process.  These softwares enable you to streamline your operations by tracking payments, managing client details, scheduling appointments, and recording business expenses—all from a single platform. Many popular options also include notary-specific features like customizable invoicing, per seal break-up and tax reporting, making it easier to stay organized and ensure precise tax filings.  Choosing the right software can help you save time, minimize errors, and maintain efficient financial records throughout the year. Among the available notary software options, Closewise stands out for its comprehensive features tailored to the needs of notaries.

2. Understand The IRS Tax Codes And Regulations

   Public notaries in the U.S. fall under fall under IRS Tax Code Section 1402(c)(2), which excludes notary fees from self-employment tax. These notaries in the US are appointed by a state government, eg, the governor, lieutenant governor, secretary of state public in the U.S.  However, notaries must report their total gross income, including fees, on their tax return while carefully distinguishing fees exempt from self-employment tax( which is 15.3% of total income). Understanding tax deductions specific to notaries is crucial for managing your finances effectively and minimizing your tax liability.  Without a clear grasp of these deductions, you risk overpaying taxes or missing opportunities to maximize your earnings. Proper knowledge ensures compliance with IRS rules while keeping your business financially efficient. Let’s better understand by an example: Let’s assume,  you earned $10,000 from your notary business in a year. Out of this, $4,000 came from notarization fees that qualify for the self-employment tax exemption under IRS Section 1402(c)(2). If you also incurred $1,000 in expenses for mileage, office supplies, and equipment, your taxable self-employment income would be calculated as follows:
   • Total income: $10,000
   • Exempt notary fees: -$4,000
   • Deductible expenses: -$1,000
   • Taxable self-employment income: $10,000- ($4000+$1000)= $5,000
   Now you’ve seen how properly applying the deduction, you lower your tax burden while staying compliant with IRS regulations.

   Things To Keep In Mind

   1. Income Beyond Notarial Acts: If you perform services outside your official notarial duties (e.g., document preparation, loan signing agent services), the income earned from those activities is subject to self-employment tax.
   2. W-2 Employees: If you work as a notary for an employer, your notarial income is likely treated as regular wages subject to payroll taxes, not self-employment tax.
   3. Business Income: If you are a public notary who operates a broader business (such as a loan signing or document preparation service) you must pay self-employment tax on the business income outside of their exempt notarial fees.

3. Monitoring Transactions Keeps Activities on Check

   As a notary, you perform multiple transactions everyday. Hence, monitoring business statements, including credit and financial statements, is essential for maintaining a clear picture of your business’s health and ensuring its success. Regularly reviewing these documents helps you track income, monitor expenses, and identify financial trends that can guide smarter decision-making.  For instance, analyzing patterns in revenue can reveal seasonal shifts or opportunities for growth, while a close look at credit statements ensures timely payments, maintaining a healthy credit score crucial for future funding needs.Incorporating this information into accounting software further streamlines your financial management. Modern tools not only organize your data but also automate calculations, reducing the likelihood of errors and saving valuable time.  By logging expenses consistently, you can create comprehensive reports that highlight areas where cost-cutting may be possible and ensure accurate tax preparation. This practice also aids in forecasting future performance. A consistent review of financial data provides insights into cash flow trends and allows you to plan for upcoming expenses or investments effectively. For example, if your statements show a recurring spike in expenses during certain months, you can budget accordingly to avoid financial strain. 

4. Estimation Of Tax

   If you’re rolling in the cash— congratulations! When you are earning a larger sum of money, you may find that it is advantageous in the future to pay estimated tax throughout the year. It’s crucial to understand, additional income from notary work can shift you to a higher tax slab—causing increased tax liability. Estimated taxes are liable to be paid four times a year: April, June, September and January.  This is important to avoid IRS disputes and avoid paying taxes more than due.

5. Last Minute Look For Grants

   As a notary, grants can provide pivotal financial support for covering operational costs. Many small business grants are specifically designed to assist entrepreneurs, so it’s worth checking if any are available in your city, county, or state. These monetary help serve as a powerful funding option that can help individuals and businesses achieve specific objectives as long as they comply with the terms.  To find these grants, research online, explore government websites, or even turn to YouTube. To explore the available opportunities, you can visit grants.gov, the official portal for government administered grants. Federal grants might support small businesses, but eligibility criteria can vary.  By understanding your eligibility and applying strategically, you can unlock resources for yourself.  For skipping the research hassle, head to the grants insights shared by other notaries. These resources offer valuable tips on eligibility and application processes. Local governments, nonprofit organizations, and private entities often offer funding opportunities tailored to small businesses, including notaries. Foundations like “National Notary Foundation” (NNF) is a great resource—supporting humanitarian efforts within the notary community.  Two of the biggest advantages of grants are that they usually don’t require repayment, making them an attractive form of financial support. Additionally, the cherry on the top is that grants are often considered non-taxable income— for personal grants and nonprofit organizations. Note: Grants for the business are subject to taxable income. The taxation of business grants depends on the specific grant given, and how the recipient spends the money.

6. Hiring a CPA For Tax Savings

   Hiring a CPA can help ensure that your tax filings are accurate and timely—minimizing error risk that could lead to penalties during IRS audits. Notaries often have complex tax situations due to income from various sources, such as notarial fees, loan signing services, and expenses related to their business.  CPA can help you go through the tax complications by providing expert advice on allowable deductions, including business expenses like office supplies, mileage, and home office costs, which can significantly reduce your taxable income. They can also advise on potential tax-saving strategies, such as setting up an LLC or other tax structures to maximize deductions and minimize self-employment taxes.  By leveraging a CPA’s expertise, you can ensure that you’re not leaving money on the table and are taking advantage of every available tax break, allowing you to keep more of your earnings.

7. Look For 1099- NEC Form

   As an independent contractor working with various companies and lenders, you can expect to receive a 1099-NEC (Non-Employee Compensation) form from any company that paid you $600 or more for loan document signing services.  If a company paid you less than $600 for your loan signing assignments during the year, they are not obligated to issue a 1099-NEC (though some may still choose to do so). However, even if you don’t receive a 1099-NEC, you’re still required to report that income on your taxes, so it’s important to maintain detailed records of all earnings throughout the year.