The QBI deduction: a 20% break for small-business income

Q: Does the QBI deduction reduce self-employment tax?

No. QBI reduces your income tax only. Self-employment tax (15.3%) is calculated on your net business profit before QBI, so the deduction doesn't change it. Think of QBI as a discount on the income-tax side of your bill, stacked on top of your ordinary business deductions.

One of the biggest breaks for the self-employed: deduct up to 20% of your business income, on top of your normal expenses. Here's how it works and when limits apply.

Updated June 2026

What it is

The Qualified Business Income deduction (Section 199A) lets most owners of pass-through businesses deduct up to 20% of their qualified business income. It comes off after your regular business expenses and lowers the income you pay income tax on. Sole proprietors, partnerships, S-corps, and most LLCs can use it.

The simple case

If your total taxable income is under an annual threshold the IRS updates each year, the math is easy: you generally just deduct 20% of your qualified business income (limited to 20% of your taxable income minus net capital gains). No wage or property tests, no phase-outs. Most freelancers and small operators land here.

Where it gets complicated

Above that income threshold, two things matter:

Wage & property limits — your deduction may be capped based on the W-2 wages your business pays and the cost of its qualified property.
Specified service businesses (SSTBs) — fields like health, law, accounting, consulting, performing arts, and financial services get phased out of QBI entirely once income climbs high enough.

If you're over the threshold or in an SSTB, this is genuinely worth a CPA's eye — the rules are intricate and the dollars are large.

QBI stacks on top ofyour ordinary deductions — it doesn't replace them. Taxottic factors the QBI math into your forecast automatically, so the deduction is reflected in what it tells you to set aside rather than being a year-end surprise.

Frequently asked

What is the QBI deduction?

The Qualified Business Income deduction (Section 199A) lets eligible self-employed people and owners of pass-through businesses deduct up to 20% of their qualified business income. It's taken on your personal return after your business expenses — it doesn't reduce self-employment tax, but it lowers the income you pay income tax on. It applies to sole proprietors, partnerships, S-corps, and most LLCs.

Who qualifies for the QBI deduction?

Owners of pass-through businesses with qualified business income. Below an annual taxable-income threshold (which the IRS adjusts each year), most businesses get the full 20% simply. Above the threshold, limits kick in based on W-2 wages your business pays and its property — and “specified service” businesses (health, law, accounting, consulting, financial services, and similar) get phased out entirely at higher incomes.

Does the QBI deduction reduce self-employment tax?

No. QBI reduces your income taxonly. Self-employment tax (15.3%) is calculated on your net business profit before QBI, so the deduction doesn't change it. Think of QBI as a discount on the income-tax side of your bill, stacked on top of your ordinary business deductions.

This guide is general information, not tax, legal, or accounting advice, and isn't a substitute for a licensed CPA or tax attorney. Tax rules change and depend on your situation; figures here are illustrative. Verify specifics against current IRS guidance or with your preparer.