Step‑by‑step guide for freelancers, gig workers, and LLC owners to claim the 20% Qualified Business Income (QBI) deduction and reduce their taxable income.
The Qualified Business Income (QBI) deduction remains a powerful tool for U.S. small business owners, freelancers, and gig workers filing IRS Form 1040 in 2025 and 2026. Worth up to 20% of qualified income, this deduction can significantly lower taxable income without requiring itemization. However, eligibility and limits depend on your filing status, income level, and business type. This blog explains how to maximize your QBI deduction and avoid common mistakes.
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📌 What Is the QBI Deduction?
The QBI deduction, created under the Tax Cuts and Jobs Act (TCJA), allows eligible taxpayers to deduct up to 20% of their qualified business income from pass‑through entities such as:
- Freelancers and gig economy workers
- LLC and partnership members
- Sole proprietors
- S‑Corporation owners
The deduction applies whether or not you itemize deductions on your return.
💰 QBI Deduction Limits for 2025 & 2026
Eligibility phases out at higher income levels, especially for certain service businesses (Specified Service Trades or Businesses—SSTBs).
| Filing Status | Full Deduction Up To | Phase‑Out Range (2025) | Phase‑Out Range (2026 est.) |
|---|---|---|---|
| Single / HOH | $190,000 | $190,001–$240,000 | $195,000–$245,000 |
| Married Filing Jointly | $380,000 | $380,001–$480,000 | $390,000–$490,000 |
Above these thresholds, deductions may be reduced based on W‑2 wages paid and the value of qualified business property.
📝 Step‑by‑Step: How to Claim the QBI Deduction
- Determine Eligible Income: Confirm that your income comes from a qualified business activity (not wages or capital gains).
- Calculate QBI: Subtract business expenses (Schedule C, E, or F) to determine net qualified business income.
- Check Income Thresholds: Compare your taxable income against 2025 or 2026 limits.
- Apply Deduction Rate: Take 20% of your QBI, subject to wage/property limitations if above the threshold.
- Report on Form 1040: Enter the deduction on Line 13 of your Form 1040.
- Attach Supporting Forms: Use Form 8995 (simple cases) or Form 8995‑A (complex cases).
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📊 Example Calculations
Example 1: Freelancer in 2025
Emma earns $100,000 in net freelance income.
- QBI Deduction: 20% × $100,000 = $20,000
- Taxable Income Reduction: $20,000
- Approximate Tax Savings: $4,400 (22% bracket)
Example 2: Married LLC Owners in 2026
John and Sarah earn $350,000 combined through their LLC.
- QBI Deduction: 20% × $350,000 = $70,000
- New Taxable Income: $280,000
- Estimated Tax Savings: ~$16,800 (24% bracket)
💡 Tips to Maximize QBI Deduction
- Split income between spouses if filing jointly to stay below thresholds.
- Pay reasonable W‑2 wages if above phase‑out thresholds to preserve eligibility.
- Track all business expenses to accurately calculate QBI.
- Consider retirement contributions (SEP‑IRA, Solo 401(k)) to reduce taxable income further.
- Use Form 8995‑A if your business income is complex or above limits.
🔎 People Also Ask (FAQs)
Q: Can W‑2 employees claim the QBI deduction?
A: No. The QBI deduction only applies to income from pass‑through entities like sole proprietorships, LLCs, and partnerships.
Q: Does the QBI deduction affect self‑employment tax?
A: No. The deduction reduces income tax liability but does not reduce self‑employment tax.
Q: What happens if I exceed the income limits?
A: The deduction may be limited or phased out, especially for SSTBs. Using W‑2 wages and property values can preserve partial deductions.
✅ Final Thoughts
The QBI deduction in 2025 and 2026 is a valuable tool for freelancers, gig workers, and small business owners. With careful planning—such as managing taxable income, tracking expenses, and using the right forms—you can save thousands on your Form 1040. Don’t miss out on this powerful deduction while it remains available under current tax law.
Pro Tip: Keep detailed business records and consult a tax professional if your income approaches the phase‑out thresholds to ensure you maximize the QBI deduction.
