The 20% QBI deduction for side income
The qualified business income deduction, often shortened to QBI or Section 199A, can lower your income tax by letting you deduct up to 20% of the profit from a side business run as a sole proprietorship. It does not reduce self-employment tax, and it has income limits and special rules, but for many side-income earners it is one of the most valuable breaks available. This guide explains how it works for 2026.
What it is
The deduction is available to owners of pass-through businesses, which includes sole proprietors, single-member LLCs reported on Schedule C, partnerships and S corporations. It lets you deduct up to 20% of your qualified business income from your taxable income. It is a deduction taken below the line on your return, not a business expense on Schedule C, so it does not reduce your self-employment tax. You do not need to itemize to claim it. It was created in 2017 and was made permanent by legislation passed in 2025.
What counts as qualified business income
Qualified business income is the net profit of your business, not its revenue. It is calculated after you subtract business expenses, and it is further reduced by three items that are deducted on your return because of the business: the deductible half of your self-employment tax, the self-employed health insurance deduction, and contributions to your own retirement plan, such as a SEP-IRA or solo 401(k). If you have more than one business, losses in one business can reduce the income from another. Wages from your day job are not qualified business income, and neither are capital gains, most interest and dividends.
The basic calculation
Your deduction is the smaller of two amounts:
- 20% of your qualified business income, and
- 20% of your taxable income, after subtracting any net capital gains.
For most people with modest side income, the first number is the smaller one, so the deduction is simply 20% of the qualifying profit.
The income thresholds for 2026
Your taxable income, before the QBI deduction itself, decides how complicated the rules get. For 2026 the thresholds are $201,750 if you file as single or head of household, and $403,500 if you are married filing jointly.
- At or below the threshold. You can claim the full 20% deduction on your qualified business income, whatever kind of business it is, with no wage or property limits. Most side-income earners are in this group. You can use the simpler Form 8995.
- Above the threshold. The deduction starts to be limited. For 2026 the phase-in range is $75,000 wide for single filers and $150,000 wide for joint filers, so the limits fully apply at $276,750 single and $553,500 joint. Within that range, the deduction is gradually restricted based on the type of business and on the wages the business pays and the property it owns. You use Form 8995-A.
Specified service businesses
Certain service fields are called specified service trades or businesses. They include health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, and any business whose main asset is the reputation or skill of its owner. If your income is below the threshold, being in one of these fields does not matter. A freelance consultant earning a modest side income still gets the deduction. If your taxable income is above the range, the deduction for a specified service business disappears entirely. Within the phase-in range, it is reduced gradually. A freelance writer, designer or developer should read the IRS rules for the line between a specified service business and other service businesses, because that classification can be a close call.
The $400 minimum
Beginning with 2026, a new rule gives taxpayers a minimum QBI deduction of $400 if they have at least $1,000 of qualified business income from businesses in which they materially participate. For very small side businesses the new minimum can exceed the standard 20% calculation. For example, 20% of $1,500 of qualified business income is $300, but the minimum gives you $400. The amount is scheduled to be adjusted for inflation in later years.
A worked example
Priya is single and earns $80,000 at her day job. On the side, she earns $20,000 of net profit from freelance design. Here is the sequence, using 2026 figures.
| Step | Amount |
|---|---|
| Net profit from Schedule C | $20,000 |
| Self-employment tax ($20,000 × 92.35% × 15.3%) | $2,826 |
| Deductible half of self-employment tax | $1,413 |
| Qualified business income ($20,000 − $1,413) | $18,587 |
| Adjusted gross income ($80,000 + $20,000 − $1,413) | $98,587 |
| Taxable income before QBI (AGI − $16,100 standard deduction) | $82,487 |
| 20% of qualified business income | $3,717 |
| 20% of taxable income (the second limit) | $16,497 |
| QBI deduction (the smaller) | $3,717 |
Priya's taxable income of $82,487 is well below the $201,750 threshold, so there are no wage or specified-service limits. In the 22% bracket, a $3,717 deduction reduces her federal income tax by about $820. It does not change her self-employment tax of $2,826.
How it affects what you set aside
The QBI deduction can reduce the federal income tax portion of your set-aside by roughly one-fifth of the income-tax rate you pay on that profit. For a taxpayer in the 22% bracket, the deduction acts like a lower effective rate of about 17.6% on the qualifying profit. The calculator on this site has an optional box to apply the 20% deduction. It does not model the phase-outs described above, so if your taxable income is above the threshold, the safer choice is to leave the box off and ask a tax professional.
Practical tips
- Tax software handles the math. Both forms are built into mainstream tax software. You only need to enter your business profit correctly.
- Retirement contributions interact with it. A SEP-IRA or solo 401(k) contribution reduces your income tax and also reduces QBI, so the net benefit is slightly less than the contribution times your bracket. See retirement accounts for the self-employed.
- Losses carry forward. If your business has a net loss, the loss reduces future QBI instead of creating a deduction.
- It only applies to a real trade or business. If your activity is really a hobby, there is no business income to qualify. See hobby vs business.
The QBI deduction does not reduce what you owe in self-employment tax, so the numbers in our self-employment tax guide still apply in full. For the broader picture of what lowers your profit in the first place, see the guide to side-income deductions.
Run the numbers with the free calculator
Sources
This guide is general information, not tax advice. Tax rules change and individual circumstances differ. Confirm the details for your situation with the IRS or a licensed tax professional.