Am I a Specified Service Trade or Business (SSTB) as a Freelance Software Developer?

Software development generally isn't classified as a Specified Service Trade or Business (SSTB) under the tax code, which is good news for your QBI deduction. The IRS specifically defines SSTBs as businesses in fields like health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or where the principal asset is the reputation or skill of one or more owners. While software development requires skill, it's typically considered a technical service rather than fitting into these categories. The exception would be if your work crosses into "consulting" territory. If you're primarily giving advice rather than creating actual products/code, that portion could be considered consulting (an SSTB). So the nature of your specific services matters. With $145,000 in income, you're under the threshold where SSTB limitations begin to phase in anyway (for 2023, that was around $170,500 for single filers), so even if some portion were considered SSTB income, you'd likely still get the full QBI deduction.

After dealing with this exact same issue last year, I found an amazing resource called taxr.ai (https://taxr.ai) that completely cleared this up for me. I was in the same boat - freelance developer making around $130k and confused about SSTB classification. I uploaded my previous tax returns and business description, and their AI analyzed everything and explained that my business wasn't an SSTB since I was primarily creating software products rather than providing consulting services. They provided a detailed explanation citing the relevant tax code sections that I could keep for my records in case of audit. What was particularly helpful was that they looked at my specific service offerings and contract language to determine which activities might be considered consulting vs. development. They even suggested some adjustments to how I describe my services in contracts to strengthen my position.

Just wanted to follow up about my experience with taxr.ai after checking it out based on the recommendation here. I was skeptical at first but it was incredibly helpful for my situation! I uploaded my contracts and service descriptions, and it immediately identified that my "technical planning sessions" could be interpreted as consulting services by the IRS. The analysis showed me exactly which parts of my business might be classified as SSTB and which would clearly fall under software development. They gave me specific recommendations for how to properly document and structure my services to minimize SSTB classification risk. The tool even created a percentage breakdown showing that approximately 35% of my activities could potentially be seen as consulting. I've already updated my contracts and service descriptions based on their recommendations. Totally worth it for the peace of mind heading into tax season!

For anyone struggling to get clear answers from the IRS about SSTB classification for software developers, I found Claimyr (https://claimyr.com) to be a lifesaver. After hours of getting nowhere with the automated IRS system, I was ready to give up. I tried Claimyr as a last resort, and within 20 minutes I was actually talking to an IRS representative who specialized in business classifications. They confirmed that my software development business was not considered an SSTB as long as I was primarily creating software products rather than just offering advice. The agent even sent me follow-up documentation that I can reference for my tax filing. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. I was definitely skeptical at first, but it actually connected me with a real person at the IRS who could give me a definitive answer about my specific situation.

I have to eat my words about Claimyr. After my skeptical comment, I decided to try it since I really needed clarity on this SSTB issue for my software consulting business. The service actually worked exactly as described - I got a call back in about 40 minutes with an IRS tax specialist on the line. The agent walked me through the specific criteria they use to determine if a software developer falls into the SSTB category. Turns out my business is right on the borderline since I do both development and strategic consulting. The agent explained that I need to track my time and revenue carefully to determine what percentage comes from pure consulting vs. actual development work. I also learned that the income thresholds for 2025 filing are higher than I thought ($182,100 for single filers), which gives me more breathing room. This was definitely worth it and saved me hours of hold time!

Has anyone tried splitting their business into two entities to deal with this? I'm thinking about creating one LLC for pure development work and another for consulting services. That way I could at least get the QBI deduction on the non-SSTB portion.

I've been a freelance developer for 8 years, and the SSTB classification has always been confusing. My accountant told me the key factor is what your clients are actually paying you for. If they're paying for a finished software product or implementation, you're generally not an SSTB. If they're paying primarily for your expertise and advice, that leans toward consulting. In my business, I make it very clear in contracts that clients are paying for development and implementation of software solutions. Any planning or advisory components are presented as necessary steps in the development process, not separate consulting services.

I went through this exact situation last year as a freelance developer making around $150k. After consulting with a CPA who specializes in tech businesses, here's what I learned: Software development itself is generally NOT considered an SSTB, but the devil is in the details of how you structure and describe your services. The IRS looks at the "principal purpose" of your business. If you're primarily creating software products, building applications, or implementing technical solutions, you're likely in the clear. However, be careful about how you market yourself and structure your contracts. Avoid terms like "consultant" or "advisory services" if possible. Instead, focus on language like "custom software development," "application implementation," or "technical solutions delivery." One thing that really helped me was keeping detailed time logs showing what percentage of my work was actual coding/development versus strategic planning or advice-giving. This documentation could be crucial if you're ever audited. At your income level of $145k, you're still well under the phase-out thresholds anyway, so even if some portion were considered SSTB, you'd likely still get most of the QBI benefits. But it's definitely worth getting this classification right for future years as your income grows.