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The qualified business income deduction, often called the QBI deduction or the Section 199A deduction, is one of the few tax breaks aimed squarely at people who work for themselves. For a gig worker or freelancer with a profit and moderate income, it can take up to 20% of business profit off the income tax calculation.
It was set to expire after 2025. Public Law 119-21 made it permanent and changed a few of the rules. Here is how it works now.
The basic rule
IRC Section 199A(a) allows a deduction for individuals equal to the lesser of:
- The combined qualified business income amount, which for most sole proprietors starts with 20% of qualified business income from each qualified trade or business, or
- 20% of taxable income, figured before the deduction itself and reduced by net capital gain.
For a typical gig worker whose only business is a Schedule C, and whose income is below the threshold discussed below, the practical answer is 20% of qualified business income, limited to 20% of taxable income.
The old expiration language in Section 199A(i) is gone. Public Law 119-21 replaced it with a minimum deduction rule, effective for tax years beginning after December 31, 2025.
What counts as qualified business income
Section 199A(c)(1) defines qualified business income as the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business. For a Schedule C filer, think of it as business profit, with adjustments.
The adjustment people miss is in Treas. Reg. 1.199A-3(b)(1)(vi). For Section 199A purposes, the deductible part of self-employment tax under Section 164(f), the self-employed health insurance deduction under Section 162(l), and deductions for contributions to qualified retirement plans are treated as attributable to the business, proportionately. So QBI is generally lower than the Schedule C profit line.
Two exclusions matter for gig workers:
- Tips you deduct. Public Law 119-21 added Section 199A(c)(4)(D). QBI does not include any amount for which you take the qualified tips deduction under Section 224. You do not get both deductions on the same dollars. See the tips deduction.
- Employee wages. Section 199A(d)(1)(B) excludes the trade or business of performing services as an employee. Your W-2 job never produces QBI.
The thresholds
Below a taxable income threshold, the calculation is simple: the wage and property limits do not apply, and service businesses are treated like any other business. Above it, limits phase in. The threshold is indexed for inflation each year.
| Tax year | Threshold (joint) | Threshold (all other returns) | Phase-in range width | Source |
|---|---|---|---|---|
| 2025 | $394,600 | $197,300 | $100,000 joint, $50,000 other | Rev. Proc. 2024-40 |
| 2026 | $403,500 | $201,750 | $150,000 joint, $75,000 other | Rev. Proc. 2025-32; IRC 199A(b)(3)(B) |
For 2026, the married filing separately threshold is $201,775 under Rev. Proc. 2025-32. Public Law 119-21 widened the phase-in range from $50,000 to $75,000, and from $100,000 to $150,000 on a joint return, for tax years beginning after 2025.
Above the threshold: wage limits and service businesses
Above the threshold, Section 199A(b)(2) limits the deduction for each business to the greater of 50% of the W-2 wages the business paid, or 25% of W-2 wages plus 2.5% of the unadjusted basis of qualified property. A solo gig worker with no employees and few assets can see the deduction shrink quickly once income passes the phase-in range.
And under Section 199A(d), a specified service trade or business, which includes fields such as health, law, accounting, consulting, and other businesses described in the statute, phases out of the deduction entirely above the range. Below the threshold, a service business qualifies like any other.
Most driving and delivery work is not a specified service trade or business. Some freelance work, such as consulting, may be. If your income is near or above the threshold, the classification matters, and it is worth getting right.
Below the threshold, QBI is simple and generous. Above it, the rules get complicated in a hurry. Know which side of the line you are on.
The new minimum deduction
Starting with tax years beginning after December 31, 2025, Section 199A(i) provides a minimum deduction of $400 for an "applicable taxpayer," meaning someone whose aggregate qualified business income from all active qualified trades or businesses is at least $1,000. An active business, for this purpose, is one in which you materially participate under Section 469(h). Both dollar amounts are indexed for inflation for tax years beginning after 2026.
For a small side gig with modest profit, that floor can matter. For larger businesses, the regular 20% calculation will usually be bigger anyway.
What QBI does not do
- It does not reduce self-employment tax. Section 199A(f)(3) says the deduction is allowed only for purposes of the income tax chapter. Self-employment tax is figured on your net earnings before any QBI deduction. See how self-employment tax is calculated.
- It does not reduce adjusted gross income. It comes after AGI, which means it does not lower AGI-based limits elsewhere on your return.
- It does not fix a loss. Under Section 199A(c)(2), if your net QBI for the year is negative, it carries forward and reduces QBI in the next year.
A quick example
Take a single delivery driver in 2026 with $40,000 of Schedule C profit and no other income. Before the QBI deduction, her qualified business income is not the full $40,000. It is reduced by the deductible half of her self-employment tax, and by any self-employed health insurance deduction attributable to the business, under Treas. Reg. 1.199A-3(b)(1)(vi). Her taxable income is far below the $201,750 threshold for 2026, so no wage limit or service business rule applies. Her deduction is 20% of that reduced QBI, capped at 20% of her taxable income before the deduction.
If she also deducted qualified tips under Section 224, those tip dollars come out of QBI first under Section 199A(c)(4)(D). The two deductions do not stack on the same income.
Where it goes on the return
The deduction is figured on Form 8995, Qualified Business Income Deduction Simplified Computation, or Form 8995-A when the more complex rules apply. It flows to your Form 1040 below adjusted gross income.
Getting it right
- Report all your business income and expenses accurately on Schedule C. Overstated expenses lower QBI; understated income inflates it, and an examiner will adjust both.
- Reduce QBI for the deductible half of self-employment tax, self-employed health insurance, and retirement contributions attributable to the business.
- Exclude any tips you deduct under Section 224.
- Check your taxable income against the threshold for the right year.
- Keep the records that support the business in the first place. See recordkeeping rules and, if your profit history is spotty, hobby or business.
Frequently asked questions
Do gig workers qualify for the QBI deduction?
Usually, if they have a profit. Self-employment income from a trade or business reported on Schedule C generally produces qualified business income under IRC 199A. Below the taxable income threshold, the deduction is generally 20% of qualified business income, limited to 20% of taxable income before the deduction and net capital gain.
What are the QBI thresholds for 2025 and 2026?
For 2025, Rev. Proc. 2024-40 sets the threshold at $394,600 for joint returns and $197,300 for other returns. For 2026, Rev. Proc. 2025-32 sets $403,500 joint, $201,750 for most other returns, and $201,775 for married filing separately. Starting in 2026, the phase-in range is $150,000 joint and $75,000 for others.
Does the QBI deduction reduce self-employment tax?
No. IRC 199A(f)(3) allows the deduction only for income tax purposes. Self-employment tax is computed on net earnings from self-employment without regard to the QBI deduction.
What is the new $400 QBI minimum?
For tax years beginning after 2025, IRC 199A(i) gives a minimum deduction of $400 to a taxpayer with at least $1,000 of qualified business income from active businesses in which the taxpayer materially participates. Both figures are indexed for inflation after 2026.
This guide is general information about federal tax law, not legal advice for your situation. Reading it does not create an attorney-client relationship.