Self employment tax and retirement contributions

I am sure some of you have dealt with this hence the question.
Hypothetically if I make 50k income of which 45k is notary-exempt from self employment tax. It means you are pay self employment tax on only 5K. Can you deduct 19500 for self 401k Contribution or is it only limited to 5k. Please reply only if you know the answer for a fact(no guesses please) and have dealt with this. It will be very helpful for the forum.

Retirement Topics - IRA Contribution Limits | Internal Revenue Service (irs.gov)

  • $6,000 ($7,000 if you’re age 50 or older), or
  • If less, your taxable compensation for the year

For determining the following data:

  • How much of the signing agent/notary income is exempt and how much to claim
  • How much you can contribute to a 401k (which is structurally different and taxed differently from an IRA)

You’ll best be served by reaching out to a professional tax accountant and/or CPA. This is the optimum route for making the determination.

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Further, the Search function is being identified to be of assistance to you. :angel:

Each of us contributes our time-proven experience & expertise. We are very busy business owners; either working with clients OR marketing/developing our business. => Our contributions/answers are provided on a voluntary basis and are offered to be of assistance & provide insight to others in this business sector.

It’s so important for each member to endeavor to perform due diligence prior to requesting the valuable time of other business owners.

As a fellow business owner , I’d like to offer an opportunity to further enhance your business acumen & skill set (speaking proverbially ) by "teaching you how to fish;" instead of giving you a fish . . .

Searching the Notary Café database for the answer (that’s more than likely already present) prior to creating a new thread or post is being considerate, thoughtful, & respectful of other members. Saves everyone time & prevents consternation. :sparkles:

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You can run a Search (upper right/magnifying glass) as it will usually be quicker than waiting for someone to reply.

Here are the results I found for you by typing “exempt taxes” in the Search field. This page is replete with threads packed with information on how to proceed in your scenario:

https://forum.notarycafe.com/search?q=exempt%20taxes

Also, this thread you may find particularly helpful:

Best Wishes. :sparkles:

This is very useful information. Thank you all who responded. With that said; can anyone recommend a good tax professional in Arizona? I feel that I should use someone who is familiar with our business.

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Your situation seems to surpass the simple, meaning you may want to speak with a qualified Tax Professional, one who’s also familiar with your States Tax rules. Each person’s financial profile is different and an error today can result in significant financial liabilities in the future.

This is not an attempt to solicit.

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As some NSA’s here may know, most of my time is spent with tax law - representation, research, remediation and other complex matters. I write briefs, petitions and appeals (among other things) for tax and probate matters.

I am not trying to self-promote. Since my tax practice is primarily representation and litigation, we do not accept new clients solely for tax preparation unless the returns are exceedingly complex (e.g.: over 1,500 pages, multi-national, etc…).

A couple of things:

Only the statutory fees (i.e.: the fee set by state law for a notary act, page or document) are exempt. For example, if one is paid $100 for a closing with 5 acknowledgements, each capped by state law at $2, only $10 from that closing is exempt from S/E tax, but not income tax. The remaining $90 is subject to both income and S/E tax. This NotaryCafe link has a decent discussion of the self-employment tax issue.

A number of retirement options are available, including:

Solo 401(k) - For 2021 contributions, the employee maximum is $19,500 (generally due by 12/31/21), and the employer’s maximum is $38,500 (generally due by return due date) for a total of $58,000., The limits for 2022 increase to $61,000. Employer contribution limited to 25% of eligible compensation.

SEP IRA - A defined-contribution plan, akin to an employer-funded pension. Limited to an employer contribution equivalent to 25% of compensation, maxing out at the $58,000 and $61,000 for 2021 and 2022, respectively.

Traditional IRA - Limited to $6,000 and $7,000 for 2021 and 2022, respectively. Contributions are made by taxpayer and generally reduce taxable income.

There are many other retirement options, which can be mixed, matched and modified as the taxpayer sees fit. There are income and total contribution limitations, as well as a whole bevy of administrative deadlines; an investment or tax professional can inform you of the options and their requirements, the former often without cost.

There’s been a whole lot of legislation passed changing deadlines and providing other relief, primarily dealing with COVID-19; I generally re-check each time the issue comes up for a client.

While a tax advisor is generally the best source of current information, investment professionals are generally kept current on these tax law changes by their companies.

Hopefully, this helps.

Be well, God bless and stay healthy.

HWB.

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Thank you for your reply. In CA they allow $15 per signature. So lot of it is exempt. I just have 1 question If 40k of 50k income is tax exempt is the employee part of retirement contribution limited to 10k (since that is the only income subject to SE) or entire 19500 can be contributed and deducted. Your answer appreciated.

Now that’s a darn good question, and the kind of issue that I normally charge clients a significant amount of money to research and issue an authoritative opinion. We usually run through all applicable statutes, regulations and case law to produce our report - fully argued, cited, Shepardized and ready to serve as an a priori defense and foundation for briefs, advance rulings, appeals and tax court petitions.

Any guidance I could give without researching would be irresponsible, and probably malpractice on my part.

The only thing I will say is that the Internal Revenue Code (IRC) strives for consistency - treating income equivalently, regardless of source or classification, unless prior statute, regulation, ruling or case law directs otherwise.

All things being equal, $1 of Job 1 income should generally be treated like $1 of Job 2 income.
Unfortunately, all things are not always equal, and I have a collection of bookcases filled with tomes on tax law, floor to ceiling; the complexity and confusion is why people hire firm.

This is a question which might benefit from the engagement of a experienced, credentialed (CPA, EA or attorney) tax practitioner. The engagement of a professional demonstrates the ‘reasonable business care and prudence’ standard that the IRS

Your tax position, and the manner by which you arrived at that position (e.g.: professional advice, published authoritative guidance) are key to prevailing in any ERISA challenge, as well as in the avoidance or abatement of any penalties.

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Sorry, mistakenly posted before completion.

Unfinished sentence: …the complexity and confusion of the =tax code is why people hire firms like mine.

One point up front… a ‘quick & dirty’ web search is silent on the question.

One other point… the investment advisors offering the plans may have authoritative information available; after all, they deal with these kinds of plans day in, day out.

HWB.

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