Self-employed professionals, freelancers, and small business owners are all responsible for paying taxes, just like employees.
But navigating the tax payment process can be a bit more complex when you work for yourself, so understanding potential credits and deductions is important. One of these is the qualified business income (QBI) deduction.
Here’s what the QBI deduction is, how it works, who’s eligible for it, and more.
Part of the 2017 Tax Cuts and Jobs Act (TCJA), the QBI deduction allows eligible self-employed taxpayers and small business owners to deduct up to 20% of qualifying business income on their federal income taxes.
This deduction, also known as the Section 199a deduction, reduces your taxable business income and can result in a lower tax burden or a larger refund, depending on your financial situation. It’s available whether you itemize your deductions or take the standard deduction.
It’s important to note that the QBI deduction doesn’t reduce your 15.3% self-employment tax, which is a combination of Social Security and Medicare taxes. It simply excludes a portion of your business income from federal taxes.
The IRS defines qualified business income as “the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business.” Essentially, any net profit you earn from your business could count as QBI, with some exceptions:
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Capital gains or losses from investments, commodities or foreign currency transactions
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Interest income
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Income for business outside the U.S.
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Wage income
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Certain dividends, including qualified real estate investment trust (REIT) dividends)
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Income from publicly traded partnerships (PTPs)
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Annuities
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Reasonable salary payments from an S corporation
Many self-employed professionals and small business owners are eligible for the QBI deduction. Here’s a breakdown of business and income qualifications. If you have questions about your eligibility, seek guidance from a tax professional.
Pass-through businesses may qualify for the QBI deduction. These entities aren’t subject to corporate taxes like C corporations. Instead, owners report their business income on their personal tax returns, and that income is taxed at ordinary income tax rates. These are eligible pass-through entity structures:
Your total business income may also affect your eligibility for the QBI deduction. Generally, you can only claim the deduction for 2024 if your income is less than $383,900 if married filing jointly and $191,950 if a single filer. In this case, the IRS considers your business as a qualified trade or business.
While income limits apply, it’s still possible to qualify for the QBI deduction even if you earn more. Certain specified services trades or businesses (SSTBs) may be eligible with higher incomes, but the rules are a bit complicated. In this case, SSTBs earning less than $241,950 ($483,900 if filing jointly) might be eligible for a reduced QBI deduction.
The IRS classifies SSTBs as businesses providing these services:
Certain rental real estate businesses that meet IRS safe harbor standards might also qualify for a QBI deduction. If any of these special considerations apply to your business, it’s best to get guidance from a tax professional on whether you’re eligible.
Calculating your QBI deduction is pretty straightforward if your business income is less than $191,950 as a single filer or $383,900 for joint filers. You add up all of your qualified business income and multiply that amount by 20% to find your deduction.
Remember qualified business income is any profit you earn from your business excluding things like investment income, dividends, and interest. So if your business earned $50,000 in qualified business income during the year, your QBI deduction would be $10,000. Put another way, the deduction reduces your taxable income by $10,000.
Service businesses, or SSTBs, that have income above that threshold may get a phased-out deduction — up to the $241,950 ($483,900 if filing jointly) limits. But calculating that deduction is trickier. Per the IRS, the deduction “may be partially or fully reduced to the greater of 50% of W-2 wages paid by the qualified trade or business, or 25% of W-2 wages plus 2.5% of the UBIA of qualified property from the qualified trade or business.” Whether you qualify for a partial deduction depends on your total business income.
In that case, it’s best to rely on a tax expert or software, such as H&R Block, to calculate your QBI deduction. You can also review the IRS instructions for Form 8995-A for additional guidance.
Enacted in 2017 for the 2018 tax year, the QBI tax deduction is currently available through the 2025 tax year. That said, it’s possible that this deduction will be extended depending on future tax reforms. But for now, if your business is eligible, claiming the QBI deduction could give you a tax break whether you itemize deductions on Schedule C or take the standard deduction.
