What Is the QBI Deduction?
Quick Answer
The QBI (Qualified Business Income) deduction allows self-employed workers and small business owners to deduct up to 20% of their net business income from their taxable income. If you are a freelancer earning $80,000 in net profit, the QBI deduction could reduce your taxable income by up to $16,000 — saving thousands in federal taxes. This deduction does not reduce self-employment tax, only income tax, but it is still one of the most valuable deductions available.
How the QBI Deduction Works
The QBI deduction is calculated after your Schedule C profit and is taken as a deduction on your personal return (Form 1040). It reduces your taxable income but does not reduce your AGI.
Basic Formula
QBI Deduction = 20% of Qualified Business Income
The deduction is limited to the lesser of:
- 20% of your QBI, OR
- 20% of your taxable income before the QBI deduction (minus net capital gains)
2025 Income Thresholds
| Filing Status | Full Deduction Below | Phaseout Range | Fully Phased Out Above |
|---|---|---|---|
| Single | $191,950 | $191,950 - $241,950 | $241,950 |
| Married Filing Jointly | $383,900 | $383,900 - $483,900 | $483,900 |
If your taxable income is below the threshold, you get the full 20% deduction regardless of your business type.
Specified Service Trades and Businesses (SSTB)
Above the income thresholds, certain professions face phaseout or elimination of the QBI deduction:
SSTBs include: Law, medicine, dentistry, accounting, consulting, financial services, performing arts, athletics, and any business where the principal asset is the reputation or skill of the owner.
Non-SSTBs include: Construction, engineering, architecture, manufacturing, retail, real estate, technology development.
If you are a consultant earning $220,000 (single), your QBI deduction is partially phased out. If you are a construction contractor earning $220,000, you still get the full deduction (though W-2 wage and property limitations may apply).
Real Example With Actual Numbers
Sophie is a freelance marketing strategist in Texas earning $95,000 in net Schedule C profit. She is single.
| Calculation | Amount |
|---|---|
| Net business income | $95,000 |
| SE tax deduction (half of SE tax) | -$6,700 |
| Standard deduction | -$15,000 |
| Taxable income before QBI | $73,300 |
| QBI deduction (20% of $95,000) | $19,000 |
| Limit (20% of $73,300) | $14,660 |
| QBI deduction taken (lesser amount) | $14,660 |
Sophie's taxable income drops from $73,300 to $58,640. At her marginal rate of 22%, this saves her about $3,225 in federal income tax.
Note: Her taxable income ($73,300) is well below the $191,950 threshold, so the full 20% applies even though marketing consulting is technically an SSTB. Use the freelance calculator to calculate your QBI deduction.
What QBI Does NOT Reduce
The QBI deduction only reduces federal income tax. It does NOT reduce:
- Self-employment tax (still 15.3%)
- FICA taxes
- State income tax (most states decouple from QBI)
- Medicare tax
How to Maximize Your QBI Deduction
- Keep taxable income below thresholds: Maximize 401(k) and HSA contributions to stay under $191,950 (single)
- Deduct all business expenses: Lower net business income does not help QBI (it reduces the 20% base), but if you are above the threshold, reducing taxable income can prevent phaseout
- Consider business structure: For non-SSTBs above the threshold, having W-2 wages (S-Corp salary) and business property can unlock additional QBI deduction calculation methods
- File jointly if married: The $383,900 threshold for married filing jointly is double the single amount, giving more room
The QBI deduction expires after 2025 under current law. Take advantage of it while it lasts.
Estimate your full self-employment tax picture at the freelance calculator or see how it compares to W-2 employment at the SalaryHog calculator.