If you are a freelancer, sole proprietor, or LLC owner, there is a massive tax break you need to know about: the Qualified Business Income (QBI) Deduction. Also known as Section 199A, this deduction was introduced in 2018 and is one of the biggest benefits of being self-employed.
In short, the QBI deduction allows eligible self-employed individuals to deduct up to 20% of their qualified business income from their taxes. Here is how it works and how to make sure you get it.
How the QBI Deduction Works
The QBI deduction is unique because it is not a business expense (like software or mileage). You don't have to spend money to get it. Instead, it is a deduction applied directly to your net business income before your federal income tax is calculated.
For example, if your freelance writing business has a net profit of $50,000, you could potentially deduct 20% of that ($10,000). You would then only pay federal income tax on the remaining $40,000.
Important Note: The QBI deduction reduces your federal income tax, but it does not reduce your 15.3% self-employment tax. You still pay self-employment tax on the full $50,000.
Who Qualifies for the QBI Deduction?
The QBI deduction is available to owners of "pass-through" entities. This includes:
- Sole proprietors (which includes freelancers and independent contractors receiving 1099s)
- Partnerships
- S-Corporations
- Limited Liability Companies (LLCs)
W-2 employees and C-Corporations do not qualify for this deduction.
The Income Limits
The IRS loves to make things complicated, so there are income limits attached to the QBI deduction. If your total taxable income (including your spouse's income if filing jointly) is below a certain threshold, you get the full 20% deduction automatically.
For 2024, the thresholds were:
- Single filers: Under $191,950
- Married filing jointly: Under $383,900
If your income is below these limits, the calculation is simple: 20% of your net business income. If your income is above these limits, the deduction begins to phase out and is subject to complex rules based on your specific profession (known as Specified Service Trades or Businesses, or SSTBs).
Keep Your Books Clean to Maximize QBI
To claim the QBI deduction, you must know your exact net business income. The only way to do that is with accurate bookkeeping.
Try FreshBooks FreeFreshBooks ensures your profit and loss statements are perfectly accurate so your CPA can easily apply the 20% QBI deduction to your tax return.
How Do I Claim It?
You claim the QBI deduction on your personal tax return (Form 1040). You do not need to itemize your personal deductions to claim QBI; you can take the standard deduction and still get the QBI deduction.
Most major tax software will automatically calculate the QBI deduction for you based on the net profit reported on your Schedule C.
We Calculate QBI Automatically
Want to know how the QBI deduction impacts your tax bill? Our free calculator automatically applies the 20% QBI deduction to your federal income tax estimate.
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