Handbook / Self-employment tax and 1099s

Qualified business income deduction for the 2026 tax year

Tax-year note: Tax information on this page applies to the 2026 tax year (returns filed in 2027), from IRS pages checked in November 2026. Figures and dates are labelled with their tax year where they appear. Check current IRS pages before you rely on them.

The qualified business income deduction, often called the QBI deduction or section 199A deduction, can reduce income tax for many sole proprietors, single-member LLC owners and other pass-through business owners. It is calculated on your return rather than as a business expense, which is why many people overlook it until tax time. This guide explains how it works for the 2026 tax year.

What it is

The IRS explains that the deduction has two components. The QBI component equals 20% of qualified business income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. The REIT/PTP component relates to certain real estate investment trust dividends and publicly traded partnership income, which most freelancers do not have.

The IRS also states that, for tax years beginning after 2025, the deduction includes a minimum deduction for active qualified business income from an active trade or business. That makes the 2026 tax year the first year it applies.

The deduction is available whether you itemize or take the standard deduction.

What counts as qualified business income

For a sole proprietor, QBI starts with the net profit from your business. The IRS explains that QBI is reduced by deductions attributable to the business, including:

• the deductible part of self-employment tax
• the self-employed health insurance deduction
• deductions for contributions to qualified retirement plans, such as SEP and SIMPLE plans

QBI does not include certain items, such as capital gains and losses, certain dividends and interest, or wages earned as an employee. The IRS says income earned through a C corporation or by providing services as an employee is not eligible.

Limits based on taxable income

The IRS says the QBI component is subject to limitations depending on taxable income, which may include:

• the type of business, including whether it is a specified service trade or business such as many health, law, accounting, consulting and financial services
• the W-2 wages paid by the business
• the unadjusted basis of qualified property held by the business

Below the income threshold, most sole proprietors can generally use the simpler calculation. Above it, these limits can reduce or eliminate the deduction, especially for service businesses with few employees. The thresholds are adjusted annually; the 2026 Form 8995 instructions give the current figures.

The overall deduction is also limited by a share of your taxable income, so it cannot exceed what the calculation allows.

Which form to use

• Form 8995, the simplified computation, is for taxpayers below the income threshold who are not patrons of agricultural cooperatives.
• Form 8995-A is for everyone else.

Tax software chooses the right form if you enter your information accurately.

What it does not do

• It does not reduce self-employment tax, which is still calculated on Schedule SE from your net earnings. See Schedule SE.
• It does not reduce your business profit on Schedule C.
• It does not affect adjusted gross income in the way above-the-line deductions do.

Planning considerations

Because QBI is reduced by retirement contributions and other related deductions, the benefit of those items is partly offset. That is rarely a reason to skip retirement saving, but it is why projections should include everything. If you are near the income threshold, the timing of income and deductions, retirement contributions and business structure can matter. A tax professional can model the options.

Estimating your tax

Include the QBI deduction when you estimate income tax for estimated payments. Leaving it out tends to overestimate your bill; including it when you do not qualify underestimates it. The guide on how much to set aside explains the overall method.

Records

Keep your Schedule C, the QBI worksheet or Form 8995, and calculations of the related deductions. If you have a loss one year, a negative QBI amount can carry forward and reduce QBI in later years, so keep those records too.

Where it fits

Your QBI starts with the profit figure from Schedule C. Clean bookkeeping and accurate categorisation make the calculation straightforward.

For the 2026 tax year, the QBI deduction can cut income tax by up to 20% of qualified business income, now with a minimum deduction for active businesses. It does not reduce self-employment tax. Use Form 8995 or 8995-A and check the income limits.