What is a specified service trade or business (SSTB)?
The Internal Revenue Service (IRS) designates a specified service trade or business (SSTB) classification. If your business is classified as an SSTB, the principal asset of your business must be the reputation or skill of the owner.
According to the IRS, the service areas of these businesses are the following:
- Health
- Law
- Accounting
- Actuarial science
- Performing arts
- Consulting
- Athletics
- Financial services
- Investing
- Investment management
This is not an exhaustive list of specified service trades or businesses. The IRS issued further statements to clarify that the phrase “reputation or skill” refers primarily to celebrity income.
However, additional wording makes it difficult to determine what a specified service trade or business is. The IRS excluded some professions from the SSTB definition, such as architecture, engineering, and some financial services occupations.
LLC vs. SSTB
LLCs, sole proprietorships, S-corps and partnerships are all business classifications. Typically, when you register your business, you choose one of these business structures.
SSTBs can be any of the above business classifications as well as an SSTB. It is a different form of classification that has to do with a specific tax deduction.
Does my business qualify as an SSTB?
To qualify as an SSTB, you must fit the definition of an SSTB and have the threshold income requirement (more on that below.)
Though you are always a key part of your business, SSTBs have a special distinction. With SSTBs, your customers are specifically hiring you. That is, without your expertise, your business would not exist.
Often, businesses that offer services or products aren’t classified as SSTBs because when you’re able to scale your business, you’re not just relying on your personal skillset.
Examples of SSTBs
The IRS specifies SSTBs as providing services in health, law, performing arts, accounting, actuarial science and consulting services, among many others, as operating an SSTB.
Here are some examples of businesses that often qualify as SSTBs to give yourself an idea:
- Healthcare: doctors, veterinarians, dentists, counselors
- Law: attorneys and law firms
- Actuarial science: economists
- Performing arts: musicians, actors
- Consultants
- Athletes
- Financial service providers: bookkeepers, financial planners, advisors, certified public accountant (CPAs), tax preparers
- Investment management: money managers, brokerage services
However, although you may fall into one of the IRS’ SSTB categories, it doesn’t automatically qualify your business.
For example, even consultants — although they are specifically mentioned in the IRS’ specified service trade or business list — do not always fall under the definition. For example, while consultants and similar professionals provide professional advice, the IRS excludes salespeople who give training courses on a product.
Similarly, doctors and other medical services may fall under the “fields of health” definition, but fitness instructors and others who improve wellness — in other words, improve health — do not. Accountants count as financial professionals, but a banker specifically does not.
It’s best to talk with a tax expert to determine whether or not you are an SSTB. If you fall into a grey area, this professional can advise you on which deductions may apply.
SSTBs can claim the qualified business income deduction
If you qualify as an SSTB, you can take the QBI tax deduction, which lowers your taxable income by 20% on your federal income tax. This is also called the 199a deduction.
Under recent tax legislation, some business owners can claim 20% of their qualified business income in certain pass-through entities. Those entities include sole proprietorships, partnerships, limited liability companies (LLCs), S corporations and some trusts and estates.
The definition of income is restricted to only those items included in taxable income. It does not include such things as capital gains, interest income and some dividends.
To qualify for the QBI tax deduction, you must meet the definition of an SSTB and income requirements.
Income requirements for the QBI deductions
There are certain income requirements for the QBI deductions. If you fit the definition of an SSTB, then you must make this threshold amount:
- Single taxpayers making less than $164,900 or married filing and making under $329,800
- You run a business that qualifies as SSTB and makes more than $164,900 and less than $214,900 as a single taxpayer ($329,800- $429,800 for married)
The difference is pretty clear. Here are a couple of specified service trade or business examples:
- An M.D. in private practice with a QBI of $500,000 cannot claim the deduction; an M.D. with a QBI of less than $164,900 can claim 20%.
- An elite fitness coach with a QBI of $500,000 can likely claim the deduction as a percentage of W-2 employees; a fitness coach with a QBI of $164,900 can claim 20%.
This adds up to quite a bit of money for business owners, regardless of wealth or stature. That’s why consulting with a tax expert who knows the Tax Code thoroughly is a good idea.
Combination of SSTB and non-SSTB
In addition, some businesses may be a combination of SSTB and non-SSTB. In that case, the de minimis rule may apply. If your total receipts are more than $25 million, and 5% of those receipts are from an SSTB, the entire entity is subject to the SSTB rules. If your total receipts are less than $25 million, and 10 percent is from SSTB, then the entire thing is considered SSTB by the IRS.
Again, when dealing with this type of specialized situation, you should consult with tax professionals to ensure you maximize the tax benefits.
Protect yourself as an SSTB business owner
SSTB may be a tax definition. But, it captures a large number of entrepreneurs who operate a specific type of business.
Often, the success of these businesses comes down to the quality and volume of services provided by the owner. That means a lot of risk lies with the people at the top. That’s the case whether the SSTB pass-through entity is a sole proprietorship, partnership, LLC or S-corp. Consider the following tips to keep your business running smoothly:
- Hire a qualified accountant. They’ll help you find small business tax deductions. This is particularly important since SSTB status excludes you from claiming the QBI once you reach the threshold income amount.
- Research and buy the right business insurance. In particular, if you run a personal services business, you may be personally responsible if something goes wrong. That can include anything from unhappy clients who want to sue under the contract to clients who have been injured or suffered losses as a result of their interaction with the company.
- Consult with business managers about mixed-service enterprises. As discussed, you can lose the QBI deduction even if only a small percentage of your receipts come from SSTB. Work with someone who can help you find the right balance that allows you to grow and expand while limiting your tax burden.
Your business decisions depend on many factors. Keep tabs on your growing revenue, and maintain positive relationships with tax and accounting professionals who can provide valuable advice. Then, you’ll have a good experience with the IRS come tax time, regardless of your income level.
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Next Insurance does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors for personalized guidance.
