As a small business owner, it can be difficult to prepare for tax season. Keeping track of income and receipts is complicated enough, and figuring out which deductions you can take presents a whole new set of issues.
However, it’s worth taking the time to learn whether or not your business may qualify as a specified service trade or business (SSTB). If this tax designation applies to you and your business, you may be eligible to deduct up to 20% of your income from that tax year as qualified business income (QBI).
If you own or operate a sole proprietorship, limited liability company (LLC), S-corporation, or partnership, claiming SSTB status on your tax returns will help you maximize your deductions and pay less federal tax.
Let’s slow down. If you’re not tax-savvy, all those acronyms might as well be a foreign language. In order to lower your tax burden, this guide will help you understand SSTB status, QBI deductions, and how they can help improve your financial picture for running your entity.
What is a specified service trade or business?
The IRS has a clear—if long and technical—definition for specified service trade or businesses (SSTB). An SSTB is:
“a trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.”
Putting it in practical terms
If you’re a personal trainer at the top of your game, an investment manager who doubles your clients’ dividends, or a beloved stage actor, your main asset or advantage might be your professional reputation, celebrity, or acclaimed skill.
Some of the kinds of work and income that the IRS associates with SSTBs include:
- Income from endorsements and advertisements
- Money made from appearing for an interview on television, radio, or online
- Profits from licensing your likeness and/or voice
While these specifications make it sound like celebrities are the only workers who can count reputation as their “principle asset,” people in any of the fields listed in the IRS definition—and many more—may qualify, as long as their training, talent, and reputation is central to their work.
How to find out if you qualify
If you work in one of the listed fields and your talent is bigger than your bank account, you might qualify. But even if you’re raking in the big bucks, you might, too.
However, the definition of SSTBs can also be oddly narrow as it applies to some professions. While “healthcare professionals” including doctors qualify for SSTB status, people working on medical research, or in the sale or promotion of pharmaceuticals and medical devices, are not eligible.
People doing work in the following fields are not eligible for this designation at all:
- Financial services work including investing, securities trading/dealing, and commodities trading
Because of the sometimes tricky-to-navigate guidelines for SSTBs, you may want to consult with a tax professional to find out if you qualify.
So you’re an SSTB. What’s next?
Once you’ve determined that you have SSTB status, you might wonder—what’s the benefit? How and why might this tax status benefit you and your business this tax year?
In 2017, the Tax Cuts and Jobs Act sought to reduce small business owners’ tax burden. One way it does so is through the Qualified Business Income (QBI) deduction.
If you’re an independent contractor or you own an S-Corporation or Partnership, you’re exactly the kind of individual QBI was designed to help. If some or all of your profit is through SSTB business, you can deduct up to 20% of your qualified business income.
What is your taxable income? It depends on how much you make in total, how much you make through SSTB work, and where your money comes from.
Qualified Business Income (QBI) explained
You can calculate QBI based on the net from income/gain and deduction/loss from your business. This is calculated only based on taxable income connected to your U.S. business. The following line-items are excluded from this calculation:
- Capital gains/losses
- Interest income
- Some dividends W-2 income
- Guaranteed payments from your partnership
You will automatically get a 20% deduction if…
In 2019, if you’re a single taxpayer making less that $160,700 in income, you already qualify for a 20% tax deduction, regardless of your SSTB status. If you’re a married taxpayer filing jointly and you make under $321,400, the same applies.
You can also take a 20% deduction if…
If you make more than $160,700 and less than $210,700 as a single taxpayer, you can claim a 20% tax deduction when you run an SSTB business. The same goes for married taxpayers filing jointly as opposed to single filers who make between $321,400 and $421,400.
You cannot take the deduction if…
If you make more than $210,700/$421,400, you cannot claim a tax deduction as an SSTB. There are still ways to claim a QBI deduction—but not through SSTB status.
Confused? Let’s take a look at some examples.
Say you’re an Instagram influencer who gets paid for ads and sponsorships and your wages paid in 2019 were $58,000. If you’re single, you can already claim a 20% tax deduction to your tax rate. No need to use the SSTB status.
If you’re an elite trainer who made $208,000, you’re eligible to claim SSTB status and deduct 20% of your QBI.
If you’re an actor who made 500K and you’re filing jointly for your tax return, you’re out of luck—your income exceeds the threshold for SSTB status.
Protecting your business
Small business owners and independent contractors claiming STTB status will want to be sure to take steps to protect their businesses. Consider working with an accountant to understand your filing statuses and take full advantage of your deductions.
When you’re a small business owner, you also want to be prepared if something goes wrong. If you invest in business insurance, your bottom line and business won’t be threatened when something goes wrong.
As your small business is changing rapidly, you need flexible, affordable insurance. Any professional claiming STTB status could greatly benefit from a general liability insurance and professional liability insurance policy. That’s why at Thimble, you can get liability insurance by the hour, day, or month to keep more money in your pocket and help you succeed. With Thimble, you can choose an affordable business insurance policy that works only when you’re working. Get a quote in just seconds, get insured, and take the first step towards protecting your business.
(And don’t forget—business insurance is a tax write off, too!)