Page 204 - Small Business IRS Training Guides

Qualified Business Income Deduction
HOW TO FIGURE THE DEDUCTION?

QBI COMPONENT

Reductions to the QBI Component (continued)

W-2 Wages

to

There are three steps determine W-2 Wages for the purpose of applying the W-2
wage limitation. First, determine the total W-2 wages paid for the year, using one of the

three methods described below. Second, if the taxpayer conducts more than one trade

or business, the W-2 wages must be allocated to the trades or business that generated

the wages in the same manner as the expenses associated with those wages. Third,

determine the amount of wages with respect to each trade or business that are properly

allocable to QBI of the trade or business (or aggregated trade or business). W-2 wages

are properly allocable to QBI if the associated wage expense is taken into account in

computing QBI under Treas. Reg. § 1.199A-3.

The total W-2 wages paid for the year in step one, generally include amounts paid to

employees reported in box 1 of Form W-2, plus certain elective deferrals relating to

qualified plan contributions (e.g., contributions to 401(k) plans and Roth IRA
contributions). However, amounts paid to statutory employees when the “Statutory

Employee” box in box 13 is checked are not W-2 wages. In addition, W-2 wages do not
include any amount that is not properly included in a return filed with the SSA on or

before the 60 th day after the due date (including extensions) for the Form W-2. Under

Rev. Proc. 2019-11, there are three methods to figure W-2 wages timely filed with the

SSA and paid to officers of an S corporation and common law employees (“relevant
Forms W-2”):

• Unmodified box method.
• Modified box 1 method.
• Tracking wages method.
Unmodified Box Method
Under the unmodified box method, W-2 wages are the smaller of:

1. The sum of the amounts reported in box 1 of the relevant Forms W-2, or

2. The sum of the amounts reported in box 5 of the relevant Forms W-2.

May 2019

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