03 Feb IRS Defines Section 199A Wages
First things first.
Your Section 199A tax deduction will benefit from your business’s W-2 wages paid to you and your employees if you
- are married and filing jointly and your taxable income is over $315,000 and less than $415,000;
- are filing as single or head of household and your taxable income is over $157,500 and less than $207,500; or
- have an in-favor business and your taxable income is greater than $415,000 (married, filing jointly) or $207,500 (filing as single or head of household).
If you are above the $415,000/$207,500 threshold with no wages and no property, your Section 199A tax deduction is zero regardless of your type of business.
Example 1. You have an in-favor business with $400,000 of qualified business income (QBI) with no wages or property. Your Form 1040 shows $500,000 of taxable income. Your Section 199A tax deduction is zero.
Note. Your $500,000 in taxable income is above the threshold. Without wages or property, the deduction is zero regardless of the type of business.
Example 2. Your in-favor business has $400,000 of QBI after wages of $300,000. Your Form 1040 shows $500,000 of taxable income. Your Section 199A tax deduction is $80,000.
For Section 199A purposes, W-2 wages include
- cash wages and benefits,
- elective deferrals,
- deferred compensation, and
- designated Roth contributions.
For Section 199A purposes, you must use one of the three following IRS-created methods to find your Section 199A wages:
- Unmodified box method. Under this effortless method, your W-2 wages are the lesser of Box 1 or Box 5.
- Modified Box 1 method. Under this more accurate method, your W-2 wages are the total of Box 1 plus amounts in Box 12 that are coded D, E, F, G, and S minus amounts in Box 1 that are not wages for federal income tax withholding purposes.
- Tracking wages method. Under this most accurate method, you track the W-2 wages subject to federal income tax withholding and add the amounts in Box 12 that are coded D, E, F, G, and S.
If you operate as an S corporation, you should use the modified Box 1 method (method 2) or the tracking changes method (method 3) to ensure your S corporation includes your elected deferrals and health insurance in its W-2 wage calculation.
As you see, you do have some wrinkles when you need wages to realize your Section 199A tax deduction. If would like my help ironing out the wrinkles, please call me on my direct line at 610.764.8399.
Mark S. Fineberg, CPA