The QBI Deduction for Freelancers in 2026: The 20% Pass-Through Deduction

The qualified business income (QBI) deduction, from Section 199A of the tax code, lets many freelancers and sole proprietors deduct up to 20% of their business profit before income tax. It was due to expire after 2025. The 2025 tax law made it permanent and added a small minimum deduction starting in 2026.

It’s one of the biggest breaks a freelancer gets, and it doesn’t require itemizing. Here’s how it works in plain English.

The basic idea

If you’re a sole proprietor, single-member LLC, or partner, your business profit flows onto your personal return. Below the income threshold, the QBI deduction is generally the smaller of:

• 20% of your qualified business income, or
• 20% of your taxable income before the QBI deduction (minus net capital gain).

You take it in addition to the standard deduction. It lowers income tax only. It doesn’t reduce self-employment tax.

What counts as qualified business income

QBI is roughly your net business profit, minus a few related deductions: the deductible half of self-employment tax, the self-employed health insurance deduction, and contributions to a self-employed retirement plan (like a SEP IRA or solo 401(k)). Wages from a W-2 job, investment income, and capital gains aren’t QBI.

2026 thresholds

Below the threshold, the simple 20% rule applies to almost everyone, including consultants, designers, writers, and developers. Above it, extra limits phase in. The 2026 figures from IRS Revenue Procedure 2025-32:

Above the threshold, two things kick in gradually across the phase-in range:

• Specified service trades or businesses (SSTBs), such as health, law, accounting, consulting, financial services, performing arts, and businesses whose main asset is the owner’s skill or reputation, lose the deduction entirely once taxable income passes the top of the range.
• Other businesses become limited by W-2 wages paid to employees and the cost of business property. A solo freelancer with no employees and little equipment can see the deduction shrink toward zero.

The new $400 minimum (starting 2026)

Revenue Procedure 2025-32 notes that the new law adds a minimum deduction of $400 for taxpayers with at least $1,000 of qualified business income from active businesses they materially participate in, starting in 2026. Both amounts will be adjusted for inflation after 2026. It mainly helps people with small side businesses.

Worked example (2026, single)

A single freelancer has $75,000 of net profit and no other income:

1. Self-employment tax ≈ $10,597, so the deductible half ≈ $5,299.
2. AGI ≈ $75,000 − $5,299 = $69,701.
3. Taxable income before QBI = $69,701 − $16,100 standard deduction = $53,601.
4. QBI ≈ $75,000 − $5,299 = $69,701, and 20% of that = $13,940. But 20% of taxable income = $10,720, which is smaller, so the deduction is $10,720.
5. Taxable income ≈ $42,881, so federal income tax ≈ $4,898 using the 2026 brackets.

Without the QBI deduction, taxable income would be $53,601 and tax about $6,504. The deduction saves roughly $1,600. You can check your own numbers, with or without QBI, in the 1099 tax calculator.

Things that reduce or complicate it

• Retirement contributions to a SEP IRA or solo 401(k) lower QBI, which slightly lowers the deduction, though the contribution usually saves more than it costs.
• Losses from one business can reduce QBI from another and can carry forward.
• S corporations work differently: the salary you pay yourself isn’t QBI.

You claim the deduction on Form 8995, or Form 8995-A if you’re above the threshold or have more complex situations.

FAQ

Sources

• IRS Rev. Proc. 2025-32 (2026 inflation adjustments)
• IRS: Qualified business income deduction
• IRS: Tax year 2026 inflation adjustments (newsroom)
• IRS: Instructions for Form 8995