The QBI deduction: 20% off your business income, explained

There is a deduction available to nearly every freelancer in America that requires you to spend nothing, keep no receipts, and file no election. It is worth up to 20% of your business profit, and a surprising number of self-employed people either have not heard of it or assume it cannot apply to them.

It is the qualified business income deduction — QBI, or Section 199A.

What it does

If you have qualified business income from a sole proprietorship, partnership, S corporation, or most rental activities, you can deduct up to 20% of that income before your federal income tax is calculated.

It is not a business expense. It does not reduce your profit, and it does not reduce your self-employment tax. It sits further down the return, reducing the income your income tax is calculated on.

For a single filer with $60,000 of profit, it is worth roughly $7,900 of deduction — which at their marginal rate saves them close to a thousand dollars of actual tax. For no spending at all.

You get it whether or not you itemise

This trips people up. The QBI deduction is taken after the standard deduction, not instead of it.

So a freelancer taking the standard deduction gets both: $16,100 of standard deduction in 2026, and their QBI deduction on top. You do not have to choose, and you do not have to itemise to qualify.

What counts as qualified business income

QBI is the net profit from your trade or business — but reduced by a few things people often forget:

• the deductible half of your self-employment tax
• self-employed health insurance premiums you deducted
• retirement contributions to a SEP-IRA or solo 401(k)

That last one produces an effect worth understanding. Putting money into a solo 401(k) reduces your QBI, which reduces your QBI deduction. The retirement contribution is still very much worth making — but it saves you slightly less than the headline arithmetic suggests, because it partly cannibalises this deduction.

Some things are explicitly not QBI: capital gains and losses, dividends, interest income not connected to the business, and wages you pay yourself from an S corporation.

The income thresholds

Below a certain taxable income, the deduction is simply 20% and nothing complicated happens. For 2026 that line is:

• $201,750 for single filers
• $403,500 for married filing jointly

Under those figures, you take 20% of your QBI, capped at 20% of your taxable income, and that is the end of it. It does not matter what kind of business you run.

Above them, two limits phase in over the next $75,000 (single) or $150,000 (joint):

The wage and property limit. Your deduction becomes capped at the greater of 50% of the W-2 wages your business pays, or 25% of wages plus 2.5% of the cost of qualified property.

For a solo freelancer this is brutal arithmetic: with no employees and no significant business property, both figures are zero. The deduction phases out to almost nothing.

The SSTB restriction. If your business is a “specified service trade or business” — health, law, accounting, consulting, athletics, financial services, performing arts, or any business whose principal asset is the reputation or skill of its employees — the deduction phases out entirely above the threshold, regardless of wages.

That definition sweeps in a very large share of freelancers. Consultants, designers working under their own name, coaches, therapists and writers frequently land inside it.

New for 2026: the $400 minimum

Beginning in 2026 there is a floor. If you have at least $1,000 of qualified business income from a business in which you materially participate, you are entitled to a minimum deduction of $400 — even if the phase-outs above would otherwise have reduced you to nothing.

It is a small amount in absolute terms, but it is genuinely new, and it means the answer to “do I get any QBI deduction at all?” is now almost always yes.

The awkward interaction with your own salary

If you run an S corporation, there is a tension worth knowing about.

S-corp owners must pay themselves a reasonable W-2 salary, and that salary is not QBI — it is wages. So every dollar you move from distributions into salary reduces your QBI deduction, while also reducing the self-employment tax you save by having an S corp in the first place.

Above the income thresholds this flips, because W-2 wages are exactly what the wage limit measures. Paying yourself more can increase the deduction you are allowed.

This is one of the genuinely difficult optimisation problems in small business tax, it depends on numbers specific to you, and it is worth paying an accountant to model rather than guessing at.

What our calculator assumes

The self-employment tax calculator on this site includes the QBI deduction, and models it for a sole proprietor with no W-2 employees and no significant business property.

That assumption is deliberate, because it describes the overwhelming majority of the people this site is for, and it makes the high-income case correct for them: with no wages and no property, both limits are zero, so the deduction phases down to the $400 floor whether the business is an SSTB or not.

If you do have employees on payroll, the calculator understates what you are entitled to — possibly by a lot. That is a case for an accountant, and a pleasant one to have.

The short version

Under roughly $200,000 of taxable income as a single filer, or $400,000 filing jointly, you almost certainly get the full 20% and it is close to free money. Above that it gets complicated quickly and depends on your industry, your payroll and your business structure.

Either way, it should be in your calculations. A quick estimate that quotes you 15.3% plus a bracket rate and stops there is overstating your bill, because it has ignored both this deduction and the deductible half of your self-employment tax.