The QBI deduction for self-employed people, explained (2026)
Updated October 22, 2026 · By the Solo Tax Optimizer team · Not tax advice
The Qualified Business Income (QBI) deduction, also called the Section 199A deduction, lets many self-employed people and owners of pass-through businesses deduct up to 20% of their business income. You don't need to itemize to get it, and for a typical freelancer it can be worth thousands of dollars a year.
Who qualifies?
The deduction is available for income from "pass-through" businesses, including:
- Sole proprietors and single-member LLCs filing Schedule C
- Partners in partnerships and multi-member LLCs
- Shareholders in S-Corporations
- Some rental real estate activities that rise to the level of a business
It does not apply to wages from a W-2 job or to income of a C-Corporation.
What counts as qualified business income?
QBI is the net profit of the business, with some adjustments. For a sole proprietor, it is reduced by:
- The deduction for half of self-employment tax
- The self-employed health insurance deduction
- Contributions to self-employed retirement plans
It never includes:
- Wages an S-Corp pays you. Only the S-Corp's remaining profit is QBI.
- Guaranteed payments to partners
- Capital gains, dividends and most interest income
The basic calculation (below the income threshold)
If your 2026 taxable income before the QBI deduction is at or below $201,750 ($403,500 if married filing jointly), the deduction is generally the smaller of:
- 20% of your qualified business income, or
- 20% of your taxable income before the QBI deduction, minus net capital gains.
The second limit catches many people by surprise. Because the standard deduction ($16,100 for single filers in 2026) lowers taxable income, the taxable-income cap is often the one that applies.
Example: $90,000 freelancer, single
| Net profit | $90,000 |
| Minus half of self-employment tax | −$6,358 |
| Qualified business income | $83,642 |
| 20% of QBI | $16,728 |
| Taxable income before QBI ($83,642 − $16,100 standard deduction) | $67,542 |
| 20% of taxable income | $13,508 |
| QBI deduction (the smaller amount) | $13,508 |
|---|
Above the threshold: extra limits
Above the threshold, two extra rules phase in over the next $75,000 of taxable income ($150,000 if married filing jointly). For 2026 they are fully in effect above $276,750 ($553,500 joint).
Specified service trades or businesses (SSTBs)
Businesses in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage, or any business whose main asset is the reputation or skill of its owners, are SSTBs. Above the phase-in range, SSTB income gets no QBI deduction. Within the range, the deduction is gradually reduced.
The wage and property limit
For businesses that are not SSTBs, the deduction above the threshold is limited to the greater of 50% of W-2 wages the business pays, or 25% of those wages plus 2.5% of the original cost of qualified business property. A one-person business with no employees and little equipment can lose most of its deduction above the range.
The new minimum deduction
Starting in 2026, if you have at least $1,000 of qualified business income from businesses you actively participate in, your deduction is at least $400. This mostly helps people with small side businesses.
How an S-Corp election changes QBI
S-Corp owners have a trade-off. Paying yourself a salary saves payroll tax, but salary is not QBI, so the deduction shrinks. For example, a $50,000 salary can reduce your QBI deduction by up to $10,000. On the other hand, for higher earners above the threshold in non-service businesses, the salary paid to you counts as W-2 wages for the wage limit and can help preserve the deduction. Our S-Corp tax calculator models this trade-off. See also when to elect S-Corp status.
How to claim it
Most people with taxable income below the threshold use Form 8995, the simplified computation. Above the threshold, or with certain other situations, you use Form 8995-A. The deduction then goes on Form 1040.
Frequently asked questions
Is the QBI deduction permanent?
The deduction was originally scheduled to end after 2025. Legislation enacted in 2025 made it permanent, widened the income range over which the limits phase in, and added a small minimum deduction for active businesses starting in 2026.
Do I need to itemize to get the QBI deduction?
No. The QBI deduction is taken in addition to either the standard deduction or itemized deductions. It reduces taxable income, but not adjusted gross income.
Does the QBI deduction reduce self-employment tax?
No. It only reduces federal income tax. Self-employment tax is calculated on your net profit before the QBI deduction.
This guide explains general federal tax rules for the 2026 tax year. It is not tax, legal or financial advice. Your situation may differ, so talk to a qualified tax professional before acting on it.