Key Takeaways
- QBI lets eligible self-employed filers deduct 20% of business profit from taxable income.
- The OBBB made QBI permanent starting 2026 - it no longer expires after 2025.
- Full deduction applies below $201,750 (single) or $403,500 (married) taxable income.
- A new $400 minimum deduction applies if you have at least $1,000 in QBI.
If you freelance, drive for a rideshare app, or run any kind of side business as a sole proprietor, there’s a decent chance you can deduct 20% of your business profit before you ever get to the standard or itemized deduction. It’s called the Qualified Business Income (QBI) deduction, and the One Big Beautiful Bill (OBBB) just made it permanent.
What Counts as Qualified Business Income
QBI is generally your net profit from a sole proprietorship, single-member LLC, partnership, or S-corp — the kind of income most freelancers and gig workers report on Schedule C. It does not include W-2 wages, so if you have a day job plus a side hustle, only the side-hustle profit qualifies.
One detail that surprises people: QBI isn’t simply your Schedule C net profit. You have to subtract the deductible half of your self-employment tax, any self-employed health insurance premiums, and self-employed retirement contributions first. For most freelancers, that means your actual QBI runs somewhat lower than the number on Schedule C line 31 — often in the 85%–93% range of that figure.
The 20% Deduction, in Plain Terms
If your taxable income is below the threshold for your filing status, the math is simple: your deduction is 20% of your QBI, capped at 20% of your taxable income minus net capital gains. No wage tests, no business-type restrictions.
For 2026, that full, no-restrictions deduction applies if your total taxable income is at or below $201,750 (single or head of household) or $403,500 (married filing jointly). Most freelancers and gig workers earning under $100,000 fall well within this range, which means the calculation for them really is just “20% of profit.”
Above those thresholds, it gets more complicated — W-2 wage and business-property limits kick in for most business types, and if you’re in specific service fields like law, accounting, consulting, or health, the deduction phases out completely above $276,750 (single) or $553,500 (married). Engineering, architecture, retail, and software development are not treated as these restricted “specified service” businesses.
The New $400 Minimum Deduction
Starting in 2026, the OBBB added a guaranteed minimum: if you have at least $1,000 of QBI from a business you materially participate in, you get at least a $400 deduction — even in years where the standard 20% calculation would produce less.
This mostly helps very small or part-time side businesses where 20% of a modest profit might otherwise round down to something tiny. It doesn’t apply if your only income is from a specified service business phased out entirely by the thresholds above.
Worked Examples
Priya drives for a rideshare app and does freelance graphic design on the side. Her Schedule C shows $28,000 in net profit after expenses. After backing out her deductible self-employment tax and a small self-employed retirement contribution, her QBI comes to about $25,000. Her taxable income is well under $201,750, so she takes the full 20%: a $5,000 deduction, on top of the standard deduction she also claims.
Marcus does IT consulting as a single-member LLC and had a slow year — $900 in net profit after expenses. Twenty percent of that would be just $180. Because his QBI is under the $1,000 floor, the new $400 minimum doesn’t apply here either — he still takes the regular 20% calculation. If his QBI had been $1,000 or more, the $400 minimum would have kicked in instead of the smaller calculated amount.
This Doesn’t Touch Your Self-Employment Tax
The QBI deduction reduces your income tax, not the 15.3% self-employment tax (Social Security and Medicare) you owe on your net earnings. I get asked about this constantly — people see a 20% deduction and assume their total tax bill for the business drops by a fifth. It only applies to the income-tax side of the ledger.
You can claim QBI whether you itemize or take the standard deduction, which makes it one of the more useful deductions available to gig workers who otherwise don’t have enough itemized expenses to bother itemizing. See my guide to quarterly estimated taxes for freelancers for how QBI factors into your estimated payment math.
Subscribe or follow us — I’ll update this page as the IRS releases new inflation-adjusted thresholds each year.
Common Issues to Watch Out For
I see the same handful of mix-ups on this one every filing season.
Confusing gross revenue with QBI. Your deduction is based on net profit after business expenses, not the total amount your platform or clients paid you.
Forgetting the SE tax and retirement adjustments. If you deduct the full Schedule C profit number as your QBI without backing out the SE tax deduction and any retirement contributions, you’ll overstate your deduction.
Assuming a day job disqualifies the side income. It doesn’t. W-2 wages from your main job aren’t QBI, but a separate freelance or gig-work profit on the side absolutely can be.
Not realizing retirement contributions can help twice. A SEP IRA or Solo 401(k) contribution both lowers your taxable income directly and reduces the QBI figure it’s calculated from — worth coordinating the two. My SEP IRA guide walks through contribution limits if you’re weighing that option.
Looking Ahead
QBI thresholds are inflation-indexed and typically adjust every year via an IRS Revenue Procedure released in the fall. Since the OBBB made the deduction permanent, there’s no more expiration date to watch for — the open question each year is just how much the thresholds move, not whether the deduction survives. I’ll update the figures here once the IRS confirms 2027 numbers. For the fuller picture of what else changed for filers under the OBBB, see my OBBB overview.
