The qualified business income (QBI) deduction lets most sole proprietors deduct up to 20% of their business income before figuring income tax, per the IRS. For a typical freelancer below the 2026 income thresholds ($201,750 of taxable income for single filers, $403,500 married filing jointly), the math is simple: the deduction is the smaller of 20% of your QBI or 20% of your taxable income before the deduction. Above those levels, limits based on wages and business type kick in. The deduction is now permanent, per the 2026 Form 1040-ES.
What counts as qualified business income
QBI is the net income from your trade or business. For a sole proprietor, it starts from your Schedule C profit. It isn’t quite the same number, though. The Form 8995 instructions say QBI takes into account items attributable to the business, including:
- the deductible part of self-employment tax,
- the self-employed health insurance deduction, and
- contributions to qualified retirement plans (SEP, SIMPLE, Solo 401(k)).
QBI excludes investment items like capital gains, most interest income and wage income. A W-2 paycheck is never QBI, even if you also freelance. That includes the salary you pay yourself from an S corporation: the Form 8995 instructions exclude reasonable compensation from an S corporation, which is one reason an S corp election usually shrinks the deduction. A single-member LLC with default treatment, on the other hand, gets exactly the same QBI deduction as a sole proprietor (LLC vs. Sole Proprietorship).
The basic formula, below the threshold
If your 2026 taxable income before the QBI deduction is at or below the threshold, your deduction is the smaller of:
- 20% of your QBI, or
- 20% of your taxable income before the QBI deduction, minus net capital gain.
That’s it. At this level, no wage limits apply and your type of business doesn’t matter. The deduction is available whether you itemize or take the standard deduction. It’s taken after AGI, so it lowers income tax but not self-employment tax.
2026 thresholds and phase-in ranges
Single, head of household, other
Single, head of household, other: full deduction up to $201,750, phase-in from $201,750 to $276,750, fully limited above $276,750.
Married filing jointly
Married filing jointly: full deduction up to $403,500, phase-in from $403,500 to $553,500, fully limited above $553,500.
- Full 20%
- No wage or business-type limits. Deduction is 20% of QBI, capped at 20% of taxable income (minus net capital gain).
- Phase-in range
- The W-2 wage / property limit phases in, and only part of an SSTB's income still counts.
- Fully limited
- QBI is limited to the greater of 50% of W-2 wages, or 25% of W-2 wages plus 2.5% of qualified property. SSTB income doesn't count at all.
Thresholds from Rev. Proc. 2025-32, section 4.26. Married filing separately: $201,775 to $276,775. How the limits work: Instructions for Form 8995-A.
The 2026 figures come from Rev. Proc. 2025-32:
- Single and all other filers (except married filing separately): threshold $201,750, phase-in up to $276,750
- Married filing jointly: threshold $403,500, phase-in up to $553,500
- Married filing separately: threshold $201,775, phase-in up to $276,775
The phase-in ranges are wider than before: $75,000 ($150,000 for joint filers), per the 2026 Form 1040-ES.
What happens above the threshold
Two limits phase in over the range, per the Form 8995-A instructions:
- The W-2 wage / property limit. Your QBI component is limited to the greater of 50% of the W-2 wages your business pays, or 25% of those wages plus 2.5% of the unadjusted basis of its qualified property. For a solo freelancer with no employees and little equipment, that limit is close to zero. Above the top of the range, the deduction from that business shrinks to almost nothing.
- The specified service trade or business (SSTB) rule. Businesses in fields like health, law, accounting, actuarial science, performing arts, consulting, athletics and financial services are SSTBs. Within the range, only part of their income counts. Above it, none does.
If you’re below the threshold, neither limit applies to you, SSTB or not.
New for 2026: a $400 minimum deduction
Starting in 2026, if you have at least $1,000 of QBI from an active trade or business, you may be able to claim a minimum deduction of $400, per the 2026 Form 1040-ES and Rev. Proc. 2025-32. It matters mainly for people with small side businesses whose regular 20% calculation would come out lower. Rev. Proc. 2025-32 says the $400 and $1,000 figures will be inflation-adjusted starting after 2026.
Example 1: a single freelancer with only business income
You’re single, your only income is $80,000 of Schedule C profit, and you take the standard deduction. Same freelancer as our quarterly estimated tax example.
- 1$80,000
Net profit (Schedule C)
- 2−$5,652
Deductible half of SE tax
$80,000 × 92.35% × 15.3% ÷ 2
- 3$74,348
Qualified business income
- 4$58,248
Taxable income before QBI deduction
$74,348 AGI − $16,100 standard deduction
- 5$14,870
20% of QBI
$74,348 × 20%
- 6$11,650
20% of taxable income
$58,248 × 20%
- 7$11,650
QBI deduction (the smaller)
Rounded to the dollar. No retirement contributions, health insurance or other income. Taxable income is below the $201,750 threshold, so no wage or SSTB limits apply.
Here the taxable income cap is the one that binds. That’s the normal outcome for a single freelancer whose only income is the business. QBI and taxable income start from the same number, but the standard deduction comes off taxable income only. So 20% of taxable income will always be the smaller figure.
Example 2: a married freelancer with a spouse’s salary
Now say you’re married filing jointly. Your business nets $60,000 and your spouse earns $90,000 in W-2 wages.
- Self-employment tax on $60,000 is $8,478, so the deductible half is $4,239.
- Your QBI is $60,000 − $4,239 = $55,761.
- Joint AGI is $90,000 + $60,000 − $4,239 = $145,761. Minus the $32,200 joint standard deduction, taxable income before QBI is $113,561.
- 20% of QBI = $11,152; 20% of taxable income = $22,712.
- Deduction: $11,152, the smaller.
This time 20% of QBI is the binding limit, because the spouse’s wages raise taxable income but aren’t QBI. Couples with one W-2 earner and one freelancer usually land here.
Which form you’ll use
The 2026 versions of the QBI forms aren’t out yet. For 2025 returns, the IRS instructions say to use the simpler Form 8995 when your taxable income before the QBI deduction is at or below the threshold, and Form 8995-A otherwise. Tax software picks the right one automatically.
Bottom line
For most freelancers, the QBI deduction is simply 20% of business income or 20% of taxable income, whichever is smaller. At $80,000 of profit it’s worth $11,650 of deductions, which is no small thing. It gets complicated only above $201,750 of taxable income ($403,500 joint). At that point, whether you’re in a service field and whether your business pays W-2 wages starts to decide how much you keep. Anything that lowers your QBI, like health insurance premiums or retirement contributions (see our contribution calculator), trims the deduction a little, but it saves more tax than it costs.