QBI and 199A: Why Certain Employee Services Never Qualify

Regulators have drawn a firm line: performing services as an employee is not a trade or business for purposes of Section 199A. That means wages and any related income from employee work are excluded from qualified business income (QBI), and no part of that wage stream can support the 20% deduction under the QBI rules. This immediate point drives the rest of the framework: the QBI deduction only applies to income from a trade or business, and the tax law does not treat employee services as such a trade or business.

Employee Services Are Not QBI: What That Means Right Now

The core rule is simple and direct. If you are an employee, you are not in a trade or business for Section 199A, so none of your income, gain, deduction, or loss linked to those employee services counts as QBI. This is true even if other parts of your return show business activity. The statute separates wage income from business income and keeps them in different lanes for QBI.

Officials have stressed that a payroll label does not change the outcome. If a worker should be classified as an employee under Federal employment tax rules, it does not matter that the employer treats the worker as a non-employee for payroll. Substance controls. For QBI, status follows the true employee relationship, not the tax paperwork the employer chooses to file.

In practice, this prevents a common misread of the law: you cannot turn wages into QBI by shifting the box that reports them or by re-labeling your role. The rule blocks that shortcut.

The Three-Year Presumption for Former Employees

Section 199A introduces a presumption targeted at workers who leave payroll and then do the same work as contractors. If a former employee continues to offer substantially the same services to the former employer on a contract basis, the law presumes that person is still performing services as an employee for QBI purposes. This presumption lasts for three years after the person stops being treated as an employee for Federal employment tax purposes.

Key details make this presumption broad:

• It applies whether services are provided directly by the individual or indirectly through an entity or entities.
• It does not turn on the structure used. A disregarded entity, a partnership, or another pass-through does not defeat the presumption.
• It focuses on the continuity of services. If the work is substantially the same as before, the presumption applies.

The impact is clear: any amounts paid by the former employer for those services during the three-year window are not QBI.

Example: Employee to Contractor, Same Work, No QBI

Consider Allen, who worked full-time for PRS (a partnership) and was treated as an employee for employment tax purposes. Allen quits, then signs a contract to provide PRS substantially the same services he used to provide as an employee.

• Solely for Section 199A, Allen is presumed to be performing services as an employee with respect to those contract services.
• Amounts PRS pays him for that work are not QBI.
• The presumption holds even if Allen forms a disregarded entity or a pass-through entity to sign the contract with PRS. The form of the arrangement does not change the QBI result.

This shows how the rule functions when a worker exits payroll but keeps doing the same tasks for the same business owner. For QBI, the law treats that as employee-type work during the three-year window.

Rebutting the Presumption: What Records Matter

There is a narrow path to rebut the presumption. Upon notice from the IRS, an individual may present records—such as contracts or partnership agreements—that provide enough evidence to confirm the person’s status as a non-employee under Federal tax law, regulations, and common-law employee classification rules.

Important procedural and evidentiary points:

1. The IRS must initiate the process with a notice. The individual then responds with documentation.
2. The standard looks to established employee classification principles. Evidence should address:
   • Control (who directs the work)
   • Independence (ability to set hours, methods)
   • Financial risk (profit or loss potential)
   • Other common-law factors

If the individual successfully rebuts the presumption, the payment stream may be treated as business income for QBI, subject to other Section 199A limits. If not, the non-QBI result stands.

Specified Service Trades or Businesses (SSTBs): When QBI May Phase Out

Section 199A places extra limits on certain service fields called specified service trades or businesses (SSTBs). When taxable income exceeds a threshold amount (based on filing status), income from an SSTB is excluded from QBI, and the deduction may be reduced or removed.

Two different outcomes arise:

• At or below the threshold amount: QBI can include income from both SSTB and non-SSTB activities.
• Above the threshold amount: QBI cannot include income from SSTB activities; the deduction may drop or go away entirely for that part of the business.

Officials have not changed the underlying list of SSTBs, but the range of covered services is wide. The examples below matter for real-world planning.

Fields Treated as SSTBs and Important Exceptions

The law treats the following fields as SSTBs, with specific carve-outs. Bolded fields list typical inclusions; italicized items note common exclusions.

• Health: Includes physicians, nurses, dentists, veterinarians, physical therapists, psychologists, and similar professionals.
  • Excludes operating health clubs or spas, payment processing, or researching/manufacturing and selling drugs or devices.
• Law: Includes lawyers, paralegals, legal arbitrators, mediators, and similar professionals.
  • Excludes services that do not require legal skills (printing, delivery, stenography).
• Accounting: Includes accountants, enrolled agents, return preparers, financial auditors, and similar professionals.
  • Includes tax return and bookkeeping services. Excludes payment processing and billing analysis.
• Actuarial science: Includes actuaries and similar professionals.

• Performing arts: Includes actors, directors, singers, musicians, entertainers, and similar professionals.

  • Excludes equipment/facility operation or broadcasting performances to the public.
• Consulting: Includes providing advice and counsel meant to influence decisions, lobbying activities, and similar professionals.
  • Excludes sales, training, educational courses, and embedded/related services that are not separately paid.
• Athletics: Includes athletes, coaches, and managers across many sports.
  • Excludes facility operation and broadcasting services.
• Financial services: Includes wealth management, finance advice, retirement planning, valuation/advisory work tied to transactions, and related advisory services.
  • Excludes taking deposits or making loans, but includes arranging lending transactions.
• Brokerage services: Includes arranging securities transactions for commission or fee (e.g., stockbrokers).
  • Excludes real estate agents/brokers and insurance agents/brokers.
• Investing and investment management: Includes fees for investing, asset management, and investment advice.
  • Excludes directly managing real property.
• Trading: Trading securities, commodities, or partnership interests.

• Dealing: Dealing in securities, commodities, or partnership interests.

• Reputation or skill as principal asset: Any trade or business where the principal asset is the reputation or skill of one or more employees or owners, shown by:

  • Receiving fees for endorsing products or services;
  • Licensing or receiving fees for use of a person’s image, likeness, name, signature, voice, trademark, or other identity-linked symbol;
  • Receiving fees for appearing at events or in media (including reality performers, media hosts, and video game players).

Officials crafted this last area narrowly. It applies to businesses earning money from licensing, endorsements, and appearance fees when reputation or skill is the principal asset. It does not sweep in every service firm that depends in part on talent or goodwill.

Example: Reputation and Endorsements as a Separate SSTB

Gordon is a well-known chef who owns multiple restaurants (each in a disregarded entity). Gordon receives a $500,000 endorsement fee for use of his name on a line of cooking tools.

• Gordon’s restaurant business is not an SSTB (the operating restaurants are non-SSTB).
• Gordon’s endorsement activity is an SSTB.
• If Gordon’s taxable income is above the threshold, the endorsement income would not generate QBI, and the deduction would not include that SSTB stream.

This demonstrates how one person can operate 1) non-SSTB core business activities and 2) separate SSTB endorsement/licensing activities. Rules apply at the trade or business level.

Why Treating an Employee as a Non-Employee Does Not Help

The QBI rules look past labels and focus on the true relationship. If a person should be an employee under Federal employment tax standards, calling that person a contractor for payroll does not change the QBI result. The three-year presumption for former employees further closes the door when the work and payer remain the same.

In short:

• Wages are out. They can’t be turned into QBI by re-labeling the worker.
• Contracting with the same employer to perform the same services shortly after leaving payroll triggers the presumption and blocks QBI during the three-year period.
• Forming an LLC, partnership, or S corporation to hold the contract does not bypass the presumption.

These limits aim to keep the QBI deduction tied to true business activity and to reduce reclassification maneuvers that would otherwise shift wage income into a lower-taxed bucket.

Practical Effects for Pass-Through Owners and Professionals

For owners of pass-throughs—sole proprietorships, partnerships, and S corporations—these rules affect planning around staffing and service lines.

• When taxable income is at or below the threshold, the QBI deduction can apply to both SSTB and non-SSTB trades or businesses, subject to other statutory limits.
• Once taxable income exceeds the threshold, SSTB income stops producing QBI. Non-SSTB activities may still qualify, assuming other requirements are met.

Real-world implications:

• A solo accountant with taxable income above the threshold may see the QBI deduction reduced or removed for accounting income (an SSTB).
• A chef who runs restaurants through pass-through entities may still claim the deduction on restaurant profits (non-SSTB), but endorsement income tied to reputation would be treated as an SSTB and could be excluded above the threshold.
• A former employee who shifts to contract status with the same payer for the same tasks falls under the presumption and cannot claim QBI on that income for three years unless successfully rebutted after an IRS notice.

According to analysis by VisaVerge.com, these rules often surprise highly skilled professionals who move from payroll to 1099 work with the same client right after leaving a job; the expected tax break does not appear because the law treats that income like employee-type income during the presumption period.

Documentation: Building a Clear Record for Classification

Given the presumption and the focus on substance, careful records matter. When the IRS issues a notice about the presumption, the individual may respond with:

• Contracts that show the nature and scope of services, including differences from prior employee duties;
• Partnership or operating agreements that set out independent business operations;
• Evidence supporting non-employee status under common-law rules, such as:
  • Control over work methods and schedule,
  • Chance of profit or loss,
  • Separate business premises,
  • Ownership of tools/equipment,
  • Ability to hire helpers,
  • Multiple clients and active marketing to the public.

These items should address the classification test rather than general business goals. The objective is to show a genuine shift from employee services to an independent trade or business under Federal standards.

Contract Structures and Entities: Why Form Alone Is Not Enough

The rule that contracting through an entity does not defeat the presumption deserves emphasis. Whether a former employee contracts:

• directly,
• through a disregarded entity, or
• through a pass-through,

the presumption applies if the services are substantially the same and the payer is the former employer. For Section 199A, form follows substance. Creating a new entity can serve other business needs—liability, operations, payroll for staff—but it will not transform employee-type services into QBI during the three-year presumption period.

Non-SSTB Carve-Outs Within Listed Fields

Several SSTB categories include specific exclusions that keep certain activities out of SSTB status:

• Health: Excludes health clubs/spas, payment processing, pharma/device R&D and manufacturing.
• Law: Excludes printing, delivery, stenography.
• Accounting: Excludes payment processing, billing analysis.
• Performing arts: Excludes equipment/facility operation and broadcasting.
• Athletics: Excludes facility operation and broadcasting.
• Consulting: Excludes sales, training, courses, and embedded or related services not separately paid.

These carve-outs reflect a narrow approach to SSTB definitions. They keep supporting and logistical work outside the SSTB umbrella when those tasks do not require the specialized skills of the listed fields. For QBI, that distinction can matter when taxable income rises above the threshold.

Threshold Amounts: Two Paths for the Deduction

The statute sets a threshold amount based on filing status. This acts as a gatekeeper:

• If taxable income does not exceed the threshold, the SSTB label does not block the deduction.
• If taxable income exceeds the threshold, the SSTB rules can reduce or remove the deduction tied to those services.

Taxpayers should review how their income level interacts with:

• The SSTB status of each trade or business;
• The employee exclusion and the three-year presumption for former employees performing the same services;
• The need to keep strong records that support true non-employee status where appropriate.

Putting It Together for Section 199A Compliance

For Section 199A, start by asking whether the income is from a trade or business. Employee services are always excluded.

• If the person recently left a job and now works for the same payer doing the same tasks, the three-year presumption will likely block QBI unless rebutted after an IRS notice by showing non-employee status under Federal standards.
• If the activity is a trade or business, the next question is whether it is an SSTB. At lower taxable income levels, the SSTB label does not block the deduction. At higher taxable income levels, the SSTB label can remove the deduction for that activity. Non-SSTB activities may still qualify, subject to other rules.

For official guidance and examples, see the IRS page on the Qualified Business Income Deduction (Section 199A). This resource explains the core structure of the deduction, the role of taxable income thresholds, and the definitions that drive eligibility.

Key takeaways:
– Employee status: Always outside the QBI lane. Wages and related income do not qualify.
– Former employee presumption: Three years when performing the same services for the former employer; applies to direct and indirect arrangements.
– Rebutting the presumption: Possible only after an IRS notice, and only with records proving non-employee status under Federal law/common-law rules.
– SSTBs: Listed service fields face exclusion when taxable income exceeds the threshold; below the threshold, SSTB label does not block the deduction.
– Carve-outs: Many SSTB categories exclude support activities that do not require specialized skills, keeping some service lines outside SSTB status.

The QBI framework rewards real, independent business activity while keeping employee services out of scope. It also targets arrangements that mimic prior employment without real change in the work itself. With accurate classification and careful records, taxpayers can align their filings to the statute’s structure and avoid surprises tied to employee treatment, SSTB limits, and the three-year presumption.