March 22, 2019

Calculating Wage Payments for the Section 199a Deduction

The tax saving opportunity available to qualifying taxpayers under the Qualified Business Income (QBI) Deduction (Section 199a) can be substantial. Initiated through the Tax Cuts and Jobs Act of 2017, the QBI Deduction permits owners of pass-through entities like S-corporations, partnerships, trusts and estates to claim a 20% deduction off their bottom line. Although it’s often considered a business deduction, it’s taken on the owner’s individual tax return since income “passes through” and is recognized as individual income. While simple in principal, the details of the deduction including benefit calculation can be quite complex. To ensure high income taxpayers don’t receive a disproportionate benefit, there are income-based phase-in limitations that may apply. A key point in determining the amount of benefit available to a taxpayer is the calculation of wage payments. Recently released final guidance has outlined the available methods and when they should be used. To help clients, prospects and others understand the limitations and wage calculation methods, Wilson Lewis has provided a summary of important details below.

QBI Deduction Limitations

From a broad perspective, the limitations on the amount of deduction that can be claimed start to phase-in when an individual’s (pass-through owner) taxable income exceeds $157,500 (taxpayers filing single) or $315,000 (married couples filing jointly). They are fully phased in when taxable income exceeds $207,000 (taxpayer’s filing single) or $415,000 (married couples filing jointly). The available deduction for taxpayer’s with income that exceeds the phase-in amount is determined by the W-2 wages paid or the combination of W-2 wages paid and the unadjusted basis immediately after acquisition of qualified property (includes business property, used owned or that has not reached the end of its depreciable period).

Wage Calculation Methods

Under the final regulations issued by the IRS earlier this year, there are three types of wage calculation methods including modified, unmodified and tracking changes methods.

Unmodified Method

Using this method, W-2 wages are calculated by taking the lesser of:

• Total entries in Box 1 of all filed Forms W-2 by the taxpayer for all employees of the taxpayer; or,
• The total entries in Box 5 of all Forms W-2 filed with SSA by the taxpayer for all employees of the taxpayer.

Modified Method

Using this method, the taxpayer makes modifications to the entries in Box 1 of filed W-2s with respect to employees of the taxpayer. Wage calculations are determined by:

• Adding the amounts in Box 1 of all Forms W-2 filed by the taxpayer for employees of the taxpayer;
• Subtract from the total amounts included in Box 1 for Form W-2 that are not wages for federal income tax withholding purposes (such as retirement plan contributions); and,
• Add the total of the amounts reported in Box 12 of W-2s properly coded D, E, F, G and S.

Tracking Wages Method

Using this method, taxpayers track the total wages subject to federal income tax withholding and make appropriate modifications. Wages calculations are determined by:

• Combining the amounts of wages subject to federal income tax withholding paid to employees of the taxpayer and reported on Form W-2 and filed of the tax year; and
• Combining the amounts reported in Box 12 of the W-2s for employees of the taxpayer and are properly coded D, E, F, G and S.

Contact Us

The various wage calculation methods are imperative to determining the extent to which a taxpayer can benefit from the QBI Deduction. These calculation methods are complex and proper calculation and benefit determination requires the guidance of a qualified advisor. If you have questions about the QBI Deduction, wage calculation methods, or need assistance with tax planning, Wilson Lewis can help! For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.