If an outside director receives both director's fees and consulting fees from the same company, how does Section 199A apply to each type of income for SSTB classification?
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To determine how Section 199A applies to an outside director who receives both director’s fees and consulting fees from the same company, we must analyze whether each type of income is considered qualified business income (QBI) and whether it is derived from a specified service trade or business (SSTB) under Section 199A.
1. Director’s Fees
Nature of Director’s Fees:- Director’s fees are compensation for serving on a corporation’s board of directors. Revenue Ruling 72-86 establishes that, when a director regularly performs duties for compensation, this activity is a trade or business for purposes of Section 162 and, by extension, for self-employment tax purposes.- If the director is not an employee of the company, the director’s fees are generally reported as non-employee compensation (not wages) and are subject to self-employment tax.
Section 199A Treatment:- Section 199A allows a deduction for QBI from a qualified trade or business, which generally includes any trade or business other than a C corporation, except for the trade or business of performing services as an employee or an SSTB (subject to income thresholds).- The trade or business of performing services as an employee is explicitly excluded from QBI.- For an outside director (not an employee), the activity is a trade or business, and the director’s fees may be QBI if all other requirements are met (e.g., effectively connected with a U.S. trade or business, included in taxable income, not excluded by other rules).
SSTB Classification:- Section 199A(d)(2) and Treas. Reg. § 1.199A-5(b) list the fields that are SSTBs, such as health, law, accounting, consulting, financial services, and any trade or business where the principal asset is the reputation or skill of one or more employees or owners.- Serving as a director is not specifically listed as an SSTB. However, if the director’s fees are paid for the individual’s reputation or skill (e.g., celebrity board members), there could be an argument for SSTB classification under the “reputation or skill” prong.- In most cases, ordinary board service is not an SSTB unless it falls under the “reputation or skill” category (such as endorsement or appearance fees, which are specifically SSTBs).
2. Consulting Fees
Nature of Consulting Fees:- Consulting fees are paid for providing professional advice and counsel to the company. Treas. Reg. § 1.199A-5(b)(1)(vi) and (b)(2)(vii) define consulting as an SSTB if the services involve providing professional advice and counsel to clients to assist them in achieving goals and solving problems.
Section 199A Treatment:- Consulting income is QBI if it is earned in a trade or business, is not from services as an employee, and is effectively connected with a U.S. trade or business.- However, consulting is specifically listed as an SSTB. Therefore, the QBI deduction for consulting income is subject to the SSTB limitations.
SSTB Classification:- Consulting is an SSTB unless the consulting services are embedded in, or ancillary to, the sale of goods or performance of services for a non-SSTB, and there is no separate payment for the consulting services.- If the outside director is separately compensated for consulting services, this income is from an SSTB.
3. Application of Section 199A SSTB Rules
Thresholds and Phase-In:- If the taxpayer’s taxable income is below the applicable threshold ($197,300 for single filers, $394,600 for joint filers in 2025), SSTB income is treated as QBI and eligible for the full deduction.- If taxable income is within the phase-in range ($197,300–$247,300 single, $394,600–$494,600 joint for 2025), only a portion of the SSTB income is eligible for the deduction, based on the applicable percentage.- If taxable income exceeds the phase-in range, no deduction is allowed for SSTB income.
De Minimis Rule:- If the director’s trade or business has gross receipts of $25 million or less and less than 10% of gross receipts are from SSTB activities, the business is not treated as an SSTB. For businesses with more than $25 million in gross receipts, the threshold is 5%.
Common Ownership Rule:- If the director’s consulting business provides services to an SSTB with 50% or more common ownership, that portion of the business is treated as a separate SSTB.
4. Summary Table
* If not employee wages and meets other QBI requirements.
** Unless paid for reputation/skill, in which case it is an SSTB.
5. Conclusion
- Director’s fees received by an outside director are generally QBI and not SSTB income, unless the fees are paid for the director’s reputation or skill (e.g., endorsement, appearance, or licensing income), in which case they are SSTB income and subject to the SSTB limitations.
- Consulting fees are QBI but are always SSTB income, so the Section 199A deduction is limited or disallowed if the taxpayer’s taxable income exceeds the SSTB phase-in range.
- The Section 199A deduction for both types of income is subject to the general QBI rules, including the W-2 wage and property limitations, and the SSTB rules as described above.
If you need a determination for a specific fact pattern (e.g., the director is also a celebrity, or the consulting is not separately compensated), more details would be required.
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