What is an SSTB? Who qualifies, tax implications, and tips for staying compliant

A specified service trade or business (SSTB) is a business category defined by the IRS. SSTBs primarily earn income from specialized services where the skill and reputation of owners or employees are the main business assets.

Understanding if your business is an SSTB matters for your taxes. This classification affects whether you can take advantage of the qualified business income (QBI) deduction.

For pass-through entities, like S corporations, partnerships, and sole proprietorships, SSTB status determines if you qualify for a 20% tax deduction on business income. Your classification directly affects your bottom line and tax planning.

What is a specified service trade or business (SSTB)?

The IRS defines an SSTB business as any trade or business that performs services in fields where the principal asset is the reputation or skill of one or more employees or owners. This classification applies to businesses offering specialized professional services, not those mainly selling products or non-specialized services.

SSTB classification came from the Tax Cuts and Jobs Act of 2017, which created the QBI deduction. Congress limited this benefit for certain service businesses to prevent high-income professionals from restructuring their income just to claim the deduction. The goal was to focus tax relief on businesses with capital investments and job creation. The main SSTB business categories include:

• Health (medical practices, dentists)
• Law (attorneys, legal consultants)
• Accounting (CPAs, bookkeepers)
• Actuarial science (actuaries)
• Performing arts (actors, musicians)
• Consulting (professional advice)
• Athletics (athletes, coaches)
• Financial services (advisors, investment managers)
• Brokerage services (arranging transactions)

What businesses are not considered an SSTB?

Not all service-based businesses fall under the SSTB classification. The IRS makes several important exceptions:

• Architecture and engineering firms are specifically excluded from SSTB rules, even though they provide professional services
• Banking and financial institutions offering traditional banking services (like lending or deposit accounts) don’t classify as SSTBs
• Insurance brokers and real estate agents may qualify as non-SSTBs, depending on whether their income is primarily from commissions or advisory services
• Product-focused businesses such as manufacturers, retailers, and hospitality providers typically do not qualify as SSTBs because their income is not tied to the skill or reputation of the owner or employees

How do I know if my company is an SSTB?

Your SSTB status depends on two main factors: What your business actually does and how much income the owners make.

If your company provides services in fields like health, law, or consulting, you might classify as an SSTB. But this can change if your business model shifts or if income levels change, so you'll need to reassess each year.

SSTB classification and the de minimis rule

The de minimis rule helps businesses with minimal SSTB activity avoid SSTB classification:

• If your gross receipts are $25 million or less and less than 10% of income comes from SSTB services, you are not considered an SSTB
• For businesses with gross receipts over $25 million, the threshold lowers to 5%

This rule allows businesses mainly engaged in non-SSTB activities to avoid SSTB classification based on minor service components.

Income thresholds and QBI deduction eligibility

Your eligibility for the full QBI deduction depends on your taxable income, which the IRS adjusts annually for inflation. For 2025:

• If you're single with taxable income below $197,300 or married filing jointly below $340,100, you can take the full QBI deduction, regardless of SSTB status
• The deduction phases out gradually above these amounts and is completely lost once income exceeds $227,300 (single) or $424,600 (married filing jointly)

How income thresholds apply by business structure

QBI deduction eligibility doesn’t just depend on total income. It also varies based on how your business is structured.

• Sole proprietors: Your personal taxable income determines eligibility
• Partnerships: Each partner's individual income affects their deduction
• S-corporation shareholders: Consider both reasonable compensation and overall taxable income

For example, a lawyer in a partnership earning $150,000 qualifies for the full deduction, while a partner earning $400,000 faces limitations.

SSTB regulations: Tips for staying compliant

Correctly determining whether your business is an SSTB is essential for tax compliance and can have a major financial impact.

Misclassifying an SSTB as a non-SSTB carries significant risks. If the IRS discovers this during an audit, they can disallow previously claimed QBI deductions, assess back taxes plus interest, and potentially apply accuracy-related penalties of 20% or more. To stay compliant and reduce your audit risk, consider these tips:

• Review the IRS rules in Treasury Regulation §1.199A-5 for official guidance on SSTB classifications
• Break down your revenue by activity type, and document what percentage comes from SSTB versus non-SSTB services
• Monitor owner income levels year-round to anticipate QBI deduction phase-outs
• Consult a tax professional who specializes in pass-through entities and the QBI deduction

Simplify SSTB tax compliance with Ramp

Managing SSTB classification and QBI eligibility requires careful financial tracking and documentation. Ramp's accounting automation software streamlines this process by automatically categorizing your revenue streams and expenses. This makes it easier to determine what percentage of your business activities qualify as SSTB services.

With real-time financial visibility, you can monitor income thresholds throughout the year and make strategic tax planning decisions before year-end. Our platform integrates with your existing accounting software and offers automation features designed for complex tax situations.

• Generate customized reports that separate SSTB and non-SSTB revenue streams
• Track owner compensation across multiple entities
• Maintain audit-ready documentation of your classification decisions

Schedule your free virtual demo to see how Ramp can simplify SSTB compliance.

FAQs

What is an example of an SSTB business?

A medical practice operated by physicians is a classic example of an SSTB, as healthcare services are explicitly included in the IRS definition. Other clear examples include law firms, accounting practices, financial advisory firms, and consulting businesses where the main asset is the skill and expertise of the owners or employees.

How does SSTB status affect your taxes?

If your business classifies as an SSTB, you may lose eligibility for the 20% QBI deduction once your taxable income exceeds certain thresholds. For 2025, the deduction phases out completely above $247,300 (single) or $494,600 (married filing jointly). This can significantly increase your tax liability compared to non-SSTB businesses. Proper classification and income planning are key to minimizing tax impact.

Does QBI go away in 2026?

The QBI deduction is currently set to expire after the tax year 2025. Unless Congress extends it, the 20% deduction for qualified business income will no longer be available starting in 2026. This change could significantly increase tax liability for pass-through businesses.