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Working for yourself \u2014 whether it\u2019s self-employed, as a freelancer, or a small business owner \u2014 has plenty of benefits. That said, there are drawbacks, and one of the more challenging of these is navigating the tax payment process.<\/p>\n
Just like employees of companies, individuals who work for themselves also need to pay taxes. But outside of hiring professional help, you\u2019re left on your own to figure out potential credits and deductions and make the most of your overall tax situation.<\/p>\n
That\u2019s where the qualified business income (QBI) deduction comes in. Let\u2019s take a look at what the QBI deduction is, how it works, and who\u2019s eligible for it.<\/p>\n
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. President Trump’s sweeping 2025 tax bill made those provisions permanent.<\/p>\n
Read more: <\/em>18 small business deductions worth knowing <\/em><\/p>\nThis 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\u2019s available whether you itemize your deductions or take the standard deduction.<\/p>\n
It\u2019s important to note that the QBI deduction doesn\u2019t 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.<\/p>\n
The IRS defines qualified business income as \u201cthe net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business.\u201d Essentially, any net profit you earn from your business could count as QBI, with some exceptions:<\/p>\n
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Capital gains or losses from investments, commodities, or foreign currency transactions<\/p>\n<\/li>\n
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Interest income<\/p>\n<\/li>\n
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Income for business outside the U.S.<\/p>\n<\/li>\n
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Wage income<\/p>\n<\/li>\n
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Certain dividends, including qualified real estate investment trust (REIT) dividends)<\/p>\n<\/li>\n
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Income from publicly traded partnerships (PTPs)<\/p>\n<\/li>\n
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Annuities<\/p>\n<\/li>\n
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Reasonable salary payments from an S corporation<\/p>\n<\/li>\n<\/ul>\n\n <\/header>\n<\/section>\nMany self-employed professionals and small business owners are eligible for the QBI deduction. Here\u2019s a breakdown of business and income qualifications. If you have questions about your eligibility, seek guidance from a tax professional.<\/p>\n
Passthrough businesses may qualify for the QBI deduction. These entities aren\u2019t 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 passthrough entity structures:<\/p>\n
Learn more: <\/em>Tax brackets and rates for 2025-26<\/em><\/p>\nYour total business income may also affect your eligibility for the QBI deduction. Generally, you can only claim the deduction for tax year 2025 if your income is less than $394,600 if married filing jointly and $197,300 if a single filer. In this case, the IRS considers your business as a qualified trade or business.<\/p>\n
While income limits apply, it\u2019s still possible to qualify for the QBI deduction even if you earn more. Certain \u201cspecified services trades or businesses\u201d (SSTBs) may be eligible with higher incomes, but the rules are a bit complicated. In this case, SSTBs earning less than $247,300 ($494,600 if filing jointly) might be eligible for a reduced QBI deduction.<\/p>\n
The IRS classifies SSTBs as businesses providing these services:<\/p>\n
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Health<\/p>\n<\/li>\n
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Law<\/p>\n<\/li>\n
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Accounting<\/p>\n<\/li>\n
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Actuarial science<\/p>\n<\/li>\n
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Performing arts<\/p>\n<\/li>\n
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Consulting<\/p>\n<\/li>\n
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Athletics<\/p>\n<\/li>\n
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Financial services<\/p>\n<\/li>\n
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Brokerage services<\/p>\n<\/li>\n
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Investing and investment management<\/p>\n<\/li>\n
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Trading or dealing in securities, partnership interests, commodities<\/p>\n<\/li>\n
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Any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners<\/p>\n<\/li>\n<\/ul>\n
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\u2019s best to get guidance from a tax professional on whether you\u2019re eligible.<\/p>\n
Calculating your QBI deduction is pretty straightforward if your business income is less than $197,300 as a single filer or $394,600 for joint filers. You add up all of your qualified business income and multiply that amount by 20% to find your deduction.<\/p>\n
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.<\/p>\n
SSTBs above that income threshold may get a phased-out deduction, up to the $247,300 ($494,600 if filing jointly) limit. But calculating that deduction is trickier. Per the IRS, the deduction \u201cmay 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.\u201d Whether you qualify for a partial deduction depends on your total business income.<\/p>\n
In that case, it\u2019s 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.<\/p>\n
Related: <\/em>Best tax deductions to claim this year<\/em><\/p>\nEnacted in 2017 for the 2018 tax year, the Tax Cuts and Jobs Act made the QBI tax deduction available through the 2025 tax year. The passing of the One Big Beautiful Bill Act on July 4, 2025, made the deduction permanent.<\/p>\n<\/p><\/div>\n
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