Glossary
What is QBI Deduction?
Definition
The Qualified Business Income (QBI) deduction lets eligible self-employed individuals and pass-through entity owners deduct up to 20% of qualified business income from their federal taxable income. It was created by the 2017 Tax Cuts and Jobs Act and is scheduled to expire in 2026 unless Congress extends it.
For a freelancer with $80,000 of Schedule C net profit, the QBI deduction is up to $16,000, reducing the income subject to federal income tax (but not self-employment tax).
Why it matters
- At a 22% federal bracket, the QBI deduction on $80,000 of net profit saves roughly $3,520 in federal income tax. That's a straight reduction in what you owe, for doing nothing.
- Most freelancers under the income thresholds ($191,950 single / $383,900 married for 2024) get the full 20% with no complications. Above those thresholds, phase-outs and specified-service-trade rules apply.
- If QBI expires at the end of 2025 without extension, freelancer federal taxes effectively rise by ~4–5% of net profit. Watch for legislative updates.
Best practices for QBI Deduction
Confirm you qualify (most freelancers do)
Below the income thresholds, virtually every Schedule C filer qualifies. Above the thresholds, specified service trades (consulting, law, health, performing arts, financial services) have phase-outs that can eliminate the deduction entirely at higher incomes.
File Form 8995 (or 8995-A)
Form 8995 is the simplified version for filers under the thresholds. Form 8995-A is the full version with the specified-service-trade calculations. TurboTax Self-Employed and most accountants handle this automatically.
Structure S-Corp election carefully
S-Corp election can affect QBI calculations in both directions. W-2 wages you pay yourself don't qualify for QBI (they're not "qualified business income" — they're wages). Distributions do. Consult a CPA before electing if close to the thresholds.
Don't confuse QBI with the SE tax deduction
The 50% of SE tax you deduct on Schedule 1 is a separate deduction. QBI is on top of that. Both apply to the same dollars of net profit but reduce different parts of your tax bill.
FAQ
Does QBI apply to all freelance income?
Yes, for any income reported on Schedule C, Schedule E (rental real estate qualifies if it rises to a trade or business), or K-1 from a pass-through entity. W-2 income doesn't qualify — it's not business income.
What counts as a 'specified service trade'?
Health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investment management, and any trade where the principal asset is the reputation or skill of the employees. Phase-outs apply above threshold income.
Will QBI expire?
Under current law, the deduction sunsets December 31, 2025 unless Congress extends it. Most tax observers expect some form of extension given its political popularity, but there's no guarantee. Plan for both scenarios if you're a high-income freelancer.
Ready for clean Schedule C numbers?
Hustlay tracks your year-to-date net profit in real time — the input every QBI calculation needs. Export tax-ready totals your accountant or filing software can drop straight into Form 8995.