What is the QBI deduction?
Key takeaways
- For 2026, you can claim the full QBI deduction of up to 20% of qualified business income if your taxable income is $201,750 or less, or $403,500 or less on a joint return, with no limit on the type of business you run.1
- If your business is your only income, the deduction is 20% of your taxable income before the deduction, not 20% of your profit, because that cap is always the lower of the two figures.
- The QBI deduction lowers your federal income tax but not your self-employment tax, so run your profit through the Solvent Quarterly Tax Estimator to see both taxes before you set your 2026 quarterly payments.
In this article
- What is the QBI deduction?
- What counts as qualified business income?
- Who qualifies for the QBI deduction?
- 3 differences between the QBI deduction and a business expense deduction
- What changed for the QBI deduction in 2026?
- How to calculate the QBI deduction in 4 steps
- How much does the QBI deduction save?
- When the QBI deduction is limited or zero
- How to estimate quarterly taxes with the QBI deduction
- Frequently asked questions about the QBI deduction
Key takeaways
- For 2026, you can claim the full QBI deduction of up to 20% of qualified business income if your taxable income is $201,750 or less, or $403,500 or less on a joint return, with no limit on the type of business you run.1
- If your business is your only income, the deduction is 20% of your taxable income before the deduction, not 20% of your profit, because that cap is always the lower of the two figures.
- The QBI deduction lowers your federal income tax but not your self-employment tax, so run your profit through the Solvent Quarterly Tax Estimator to see both taxes before you set your 2026 quarterly payments.
The QBI deduction, also called the section 199A deduction, lets sole proprietors, freelancers, and other pass-through business owners deduct up to 20% of their qualified business income. You claim it on Form 8995 whether you itemize or take the standard deduction, and it lowers income tax, not self-employment tax. This guide covers what counts as QBI, who qualifies, how the deduction is calculated, and what changed for 2026.
What is the QBI deduction?
The QBI deduction is a federal income tax deduction of up to 20% of the qualified business income you earn from a sole proprietorship, partnership, S corporation, or single-member LLC. It comes from section 199A of the tax code, which the 2017 Tax Cuts and Jobs Act created and the One Big Beautiful Bill Act made permanent. It also covers 20% of qualified REIT dividends and publicly traded partnership income.
You take the deduction after adjusted gross income, and the IRS says it is "available regardless of whether taxpayers itemize deductions on Schedule A or take the standard deduction."2 So you get the standard deduction and the QBI deduction together.
The QBI deduction lowers federal income tax only. Self-employment tax is figured before it, so the deduction does not change what you owe on Schedule SE.
What counts as qualified business income?
Qualified business income is the net profit from a US trade or business you own, after the business deductions that relate to it, including the deductible half of self-employment tax.3
Income that counts as QBI
Income that counts as QBI is the net profit or loss from a qualified business, such as your Schedule C line 31 profit or your share of partnership or S corporation profit on a K-1.
The IRS then reduces that profit by three items: the deductible part of self-employment tax, the self-employed health insurance deduction, and contributions to qualified retirement plans. What's left is your QBI.
Income that does not count as QBI
Income that does not count as QBI includes wages, investment income, and pay you receive for your own work through a partnership or S corporation. The Form 8995 instructions exclude:
- W-2 wages, except for statutory employees (see the FAQ below)
- Reasonable compensation an S corporation pays you
- Guaranteed payments from a partnership
- Capital gains and losses, dividends, and interest not allocable to the business
- Tips you deduct under the new tips deduction (section 224)
If your LLC is taxed as an S corp, the salary you pay yourself is not QBI. This is why an S corp election reduces the deduction. The guide to S corp vs LLC works through that trade-off.
Who qualifies for the QBI deduction?
You qualify for the QBI deduction if you have qualified business income from a sole proprietorship, partnership, S corporation, or LLC taxed as one of those, and your taxable income is at or below the 2026 threshold or your business passes the limits above it.
Who qualifies and who does not
Sole proprietors, single-member LLC owners, partners, and S corporation shareholders qualify, and employees and C corporations do not.
| You are | QBI deduction? | Notes |
|---|---|---|
| Freelancer, independent contractor, or gig worker filing Schedule C | Yes | On your net profit, after the IRS reductions above |
| Owner of a single-member LLC with no corporate election | Yes | The LLC is disregarded, so its profit is your Schedule C profit |
| Partner in a partnership or multi-member LLC | Yes | On your share of profit, not your guaranteed payments |
| S corporation shareholder | Yes | On your K-1 profit, not your salary |
| C corporation owner | No | A C corporation's income is not QBI |
| W-2 employee | No | Wages are not QBI. See 1099 vs W-2 |
What businesses don't qualify for the QBI deduction?
Every kind of business qualifies for the QBI deduction at or below the 2026 threshold, but above it a specified service trade or business starts to lose the deduction. The specified service fields are health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, trading or dealing in securities, and any business whose principal asset is the reputation or skill of its owners or employees.
A delivery driver or a freelance designer works outside the listed fields, and a freelance consultant or tax return preparer works inside them. So check your field before you rely on the full deduction above $201,750. The limits are covered in the section on when the deduction is limited or zero, below.
3 differences between the QBI deduction and a business expense deduction
The 3 differences between the QBI deduction and a business expense deduction are where you take the deduction, whether it lowers self-employment tax, and whether it lowers your adjusted gross income. A business expense comes off your Schedule C profit, and the QBI deduction comes off your taxable income after that profit is already figured.
| Difference | QBI deduction | Business expense deduction |
|---|---|---|
| Where you take it | Form 8995 or 8995-A, then your Form 1040 | Schedule C, Part II |
| Whether it lowers self-employment tax | No. It applies to income tax only4 | Yes. It lowers the Schedule C profit that Schedule SE taxes |
| Whether it lowers adjusted gross income | No. It comes off after AGI | Yes. A lower profit is a lower AGI |
A dollar of business expense saves you both taxes, and a dollar of QBI deduction saves you income tax only. The 1099 deductions list covers the expenses you can take on Schedule C.
What changed for the QBI deduction in 2026?
Four things changed for the QBI deduction in 2026: it became permanent, the income range where limits phase in got wider, the thresholds rose with inflation, and a $400 minimum deduction began.
| Item | 2025 | 2026 | Source |
|---|---|---|---|
| Expiration | Scheduled to end after 2025 | Permanent | One Big Beautiful Bill Act (Pub. L. 119-21 §70105) |
| Threshold, single, head of household | $197,300 | $201,750 | Instructions for Form 8995 (2025); Rev. Proc. 2025-32 §4.26 |
| Threshold, married filing jointly | $394,600 | $403,500 | Same |
| Phase-in range width | $50,000 ($100,000 joint) | $75,000 ($150,000 joint) | 26 U.S.C. §199A(b)(3)(B) and (d)(3) |
| Top of the phase-in range | $247,300 ($494,600 joint) | $276,750 ($553,500 joint) | Same as the thresholds |
| Minimum deduction | None | $400, if you have at least $1,000 of QBI from businesses you materially participate in | 26 U.S.C. §199A(i) |
For married filing separately, the 2026 threshold is $201,775, with the phase-in ending at $276,775.
The $400 minimum helps a part-time freelancer whose taxable income is small enough that 20% of it comes to less than $400. The $400 minimum applies after the taxable income cap, so it can raise a capped deduction to $400. Material participation is the IRS passive activity test, not a new test.
How to calculate the QBI deduction in 4 steps
You can calculate the QBI deduction in 4 steps if your taxable income is at or below the 2026 threshold, which is when Form 8995, the simplified form, applies. Above the threshold you use Form 8995-A and the limits in the section below. The example is a single filer with $80,000 of profit and no other income in 2026.
Step 1: Find your qualified business income
Find your qualified business income by starting with your net profit and subtracting the deductible half of self-employment tax, your self-employed health insurance deduction, and your retirement plan contributions. On $80,000 of profit, the deductible half of self-employment tax is $5,651.82, so QBI is $74,348.18.
Step 2: Take 20% of your qualified business income
Take 20% of your qualified business income to get the QBI component. $74,348.18 × 20% = $14,869.64.
Step 3: Cap it at 20% of your taxable income
Cap it at 20% of your taxable income before the QBI deduction, minus any net capital gain, and keep the lower figure. In the example, $80,000 − $5,651.82 − $16,100 standard deduction = $58,248.18 of taxable income before the deduction.
20% of that is $11,649.64, which is lower than $14,869.64, so the deduction is $11,649.64.
If the business is your only income, the cap always wins, because your taxable income is your QBI minus the standard deduction. Other income, such as a spouse's wages, raises the cap.
Step 4: Claim it on Form 8995
Claim it on Form 8995, or Form 8995-A if your taxable income is above the threshold, and carry the result to your Form 1040. Tax software fills Form 8995 from your Schedule C answers. Check that the business is marked as a qualified business and not as a specified service business by mistake.
How much does the QBI deduction save?
The QBI deduction saves a single freelancer with no other income about $730 of federal income tax at $50,000 of profit and about $2,180 at $80,000 in 2026.
| Net profit | QBI (profit minus half SE tax) | 20% of QBI | 20% of taxable income | Your deduction | Income tax saved |
|---|---|---|---|---|---|
| $30,000 | $27,880.57 | $5,576.11 | $2,356.11 | $2,356.11 | $235.61 |
| $50,000 | $46,467.61 | $9,293.52 | $6,073.52 | $6,073.52 | $728.82 |
| $80,000 | $74,348.18 | $14,869.64 | $11,649.64 | $11,649.64 | $2,182.77 |
| $120,000 | $111,522.27 | $22,304.45 | $19,084.45 | $19,084.45 | $4,198.58 |
The table assumes a single filer, tax year 2026, the standard deduction, no other income, no health insurance or retirement deductions, and federal tax only. No row reaches the $201,750 threshold, so no specified service or wage limit applies.
The saving is the deduction taxed at the bracket rates it removes, so it grows faster than the deduction once profit reaches a higher bracket.
When the QBI deduction is limited or zero
The QBI deduction is limited when your taxable income is above $201,750 ($403,500 joint) in 2026, and it is zero when you have no qualified business income or no taxable income.
If you run a specified service business above the threshold
If you run a specified service business above the threshold, your deduction shrinks across the $75,000 phase-in range ($150,000 joint) and reaches zero at $276,750 ($553,500 joint). Only an applicable percentage of the business's QBI, wages, and property counts, and that percentage falls evenly from 100% at the threshold to 0% at the top of the range.
If you run another kind of business above the threshold
If you run another kind of business above the threshold, your deduction for that business is limited to the greater of 50% of the W-2 wages it pays, or 25% of those wages plus 2.5% of the original cost of its depreciable property.
A solo freelancer with no employees and little equipment pays no W-2 wages, so above the range the limit can take the deduction to zero. Inside the range the limit phases in gradually. The deduction does not end at $276,750 for every business, only for specified service businesses.
Why am I not getting a QBI deduction?
You're not getting a QBI deduction if your business had a net loss, your taxable income before the deduction is zero, or the only income you have is wages. A net QBI loss carries forward and reduces next year's QBI. It does not create a deduction.
The deduction cannot be more than 20% of your taxable income, so zero taxable income means a zero deduction. The 2026 minimum can raise a small deduction to $400, but it cannot take your taxable income below zero.
How to estimate quarterly taxes with the QBI deduction
To estimate quarterly taxes with the QBI deduction, project your year's profit, figure the deduction from it, and spread the income tax and self-employment tax you'll owe across four payments. The Solvent Quarterly Tax Estimator turns a year-to-date profit into a quarterly payment and shows each step, including the taxable income cap from Step 3.
The QBI deduction calculator, which will cover the limits above the threshold, is still being built.
Solvent quarterly tax estimator
Estimate your quarterly tax payment
Frequently asked questions about the QBI deduction
Does rental income qualify for the QBI deduction?
Rental income qualifies for the QBI deduction when the rental activity counts as a trade or business. The IRS also offers a safe harbor in Rev. Proc. 2019-38 that treats a rental real estate enterprise as a business if it meets that ruling's record and service-hour rules. A rental that passes neither test does not produce QBI.
Can you take the QBI deduction if you also have a W-2 job?
Yes, you can take the QBI deduction if you also have a W-2 job, on your business income only. Your wages are not QBI. They do raise your taxable income, which raises the 20% taxable income cap, so a side business owner with a salary often gets closer to the full 20% of QBI.
Do you get a separate QBI deduction for each business?
Yes, each business you own is a separate business for the QBI deduction, and the results are added together, so a loss from one reduces the QBI from the others. Above the threshold, you can elect to combine businesses on Form 8995-A if you meet the IRS ownership rules and none is a specified service business.
Does the QBI deduction lower your state income tax?
The QBI deduction lowers your federal income tax, because it is a deduction under section 199A of the federal tax code. Whether your state allows a matching deduction depends on how your state's tax code follows the federal one, so check your state department of revenue before you count it in a state estimate.
Do statutory employees get the QBI deduction?
Yes, statutory employees can get the QBI deduction on wages in box 1 of Form W-2 when box 13 is checked for statutory employee. Those wages go on Schedule C as business income, so they can count as QBI. Wages without that box checked are employee pay and never count toward the deduction.
About the author
Nicolas Straut
Personal and business finance writer, former Forbes contributor
Nicolas Straut writes about self-employment and quarterly tax, LLC formation and costs, and tax software for Solvent. He has written about money for about ten years, including for the fintech companies NorthOne and Fundera. He files his own taxes as a freelancer. He isn't a CPA or an enrolled agent (EA).
More articles by Nicolas Straut →Sources
- https://www.irs.gov/pub/irs-drop/rp-25-32.pdf
- https://www.irs.gov/newsroom/qualified-business-income-deduction
- https://www.irs.gov/instructions/i8995
- https://www.law.cornell.edu/uscode/text/26/199A
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