As a small business owner, preparing for tax season can be tough. Keeping track of income and receipts is complicated enough, and figuring out which deductions you can take presents a whole new set of challenges.
However, it’s worth taking some time to learn whether or not your business qualifies as a specified service trade or business (SSTB). If this tax designation applies to you and your business, you might be able to deduct 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.
In this guide, we’ll help you understand what professions qualify for SSTB status, how QBI deductions work, and what you need to do in order to get the SSTB tax credit and lower your taxable income.
What is a specified service trade or business?
Put in the simplest of terms, an SSTB is a business designation that is recognized by the Internal Revenue Service (IRS). It accounts for businesses in specific fields, including but not limited to health, law, consulting, athletics, and financial services. In order to be considered an SSTB, the business’s principal asset must be the reputation or skill of the owner or employees.
However, not every law firm or investment brokerage automatically qualifies as an SSTB. According to the IRS, SSTBs must earn the majority of their income from one of the following avenues:
- Earning income from endorsements and advertisements
- Making money from appearing in television, radio, or online interviews
- Taking 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,” regular people in many other fields may qualify, as long as their training, talent, and reputation is central to their work.
Here’s an example.
Imagine that you’re a highly-trained orthopedic surgeon who has become the go-to specialist for your city’s professional sports teams. You’ve mended dozens of injured players who have recovered and gone on to win championship games. Eventually, you develop a reputation as the orthopedic surgeon in the area, and your practice starts making more money than ever before.
In this situation, your reputation as a surgeon has a direct impact on your career success and income. Plus, you might get interviewed on the local news, or get featured in a sports magazine about injury prevention for athletes. This is an example of a non-celebrity who may be able to claim SSTB status.
Professions on the specified service trade or business list
To determine whether your business is considered an SSTB, you should start by looking at the industries that qualify. According to IRS guidelines,1 if you work in one of the following fields and meet the work and income requirements you might qualify for the SSTB designation. Keep in mind that the list of specified trade services or business professions below is not exhaustive for each category.
- Health (doctors, nurses, chiropractors, massage therapists, veterinarians, dentists, psychologists)
- Law (attorneys, paralegals, mediators, legal arbitrators)
- Accounting (bookkeepers, tax preparers, auditors)
- Actuarial science (economists, mathematicians, statisticians, but only if performing analysis for an actuary)
- Performing arts (actors, directors, singers, playwrights, musicians)
- Consulting (must provide professional advice and charge for your service)
- Athletics (players, team managers, team owners)
- Financial services (underwriters, financial planners, merger & acquisition advisors)
- Investment management (money managers, investment bankers)
What is not a specified service trade or business?
A wide range of professions can be considered an SSTB. However, the definition of SSTBs can also be oddly narrow as it applies to some jobs.
For example, healthcare practitioners that provide direct care to patients, like a nurse or chiropractor, could be considered specified service trade or business examples. But a personal trainer or medical researcher would not be eligible. Similarly, some financial professionals and accountants may qualify as SSTBs, but if you work in banking, you’re excluded.
Here’s a more exhaustive list of people who are not eligible for the SSTB designation:
- Transportation workers
- Sales professionals
- Engineers
- Real estate agents
- Restaurant workers
- Teachers
- Contractors and landscapers
- Bank tellers
- Beauty salon workers
- Gym owners
- Costume designers
- Make up artists
Because of the sometimes tricky-to-navigate guidelines for SSTBs, we recommend that you consult with a tax professional to find out if you qualify.
So, you’re an SSTB — what happens next?
Once you’ve determined that you have SSTB status, you might wonder what that means and what happens next.
If you’re an independent contractor or you own an S-Corporation or partnership, it means you might be able to lower your taxable income by 20% through the qualified business income (QBI) deduction.
So, what’s your taxable income? Taxable income is a simple calculation of your gross annual earnings, minus your tax deductions such as rented office space, health insurance premiums, self-employment deductions, and whatever else is relevant for your business.
Once you know your taxable income for the year, you can figure out your QBI, which we’ll cover next.
Qualified business income deduction explained
QBI is calculated based on the net from income/gain and deduction/loss from your business. It’s only based on taxable revenue that is earned through your business. It does not include the following forms of income:
- Capital gains/losses
- Interest income
- Some dividends W-2 income
- Guaranteed payments from your partnership
As of 2021, you are eligible for a qualified business income deduction of 20% for the previous tax year if . . .
- Regardless of your SSTB status, you’re a single taxpayer making less than $164,900 in income, or you’re a married taxpayer filing jointly and you make under $329,800.
- You run a business that qualifies as an SSTB and make more than $164,900 and less than $214,900 as a single taxpayer. The same goes for married taxpayers filing jointly who make between $329,800 and $429,800.
However, you are not eligible for a qualified business income deduction as an SSTB if you make more than $214,900 as a single taxpayer or more than $429,800 as a married couple filing jointly. (You might still qualify for a QBI deduction—but not through SSTB status.)
Here are a few examples of how the QBI deduction applies:
- An Instagram influencer gets paid for ads and sponsorships, and takes home $105,000 in the taxable year. If they file as a single taxpayer, they can automatically claim a 20% tax deduction to their tax rate. No need to use the SSTB status.
- A husband and wife run an accounting firm that makes $600,000 per year. If they file jointly, they wouldn’t be eligible to use the tax credit because their income exceeds the threshold for SSTB status.
Protect your SSTB with insurance
If you’re a small business owner or independent contractor that qualifies for SSTB status, it could give you a big advantage when April 15th rolls around. But as your bank account grows, so does your financial risk.
Investing in business insurance, like general liability insurance and professional liability insurance, can protect your bottom line if something goes wrong.
At Thimble, you can get insurance by the job, month, or year to keep more money in your pocket as your business scales. Click “Get a Quote” or download the Thimble app, enter your ZIP code, answer a few questions, and purchase coverage in less than a few minutes.
And don’t forget — business insurance can be a tax write-off, too!
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