The Tax Cuts and Jobs Act of 2017 created a deduction that a lot of self-employed people do not fully understand or take advantage of: the Qualified Business Income (QBI) deduction, also called the Section 199A deduction.

The short version: eligible self-employed people can deduct up to 20% of their qualified business income from their taxable income. On $100,000 in business income, that is a $20,000 deduction before applying income tax rates. At the 22% bracket, that saves you $4,400 in taxes. It is not nothing.

The basic mechanics

QBI is your net profit from self-employment (or other pass-through business income) after the standard business deductions. The deduction is 20% of that QBI, subject to several limits that depend on your income level and business type.

The deduction cannot exceed 20% of your taxable income (after the standard deduction and other deductions). This is a ceiling, not a floor.

The income thresholds

Below certain income levels, the QBI deduction is straightforward. Above them, it gets complex.

Under $191,950 (single) / $383,900 (MFJ)

Simple. Deduct 20% of QBI. No additional tests required.

$191,950-$241,950 (single) / $383,900-$483,900 (MFJ)

Phase-out zone. The W-2 wage limit and SSTB restrictions phase in gradually.

Above $241,950 (single) / $483,900 (MFJ)

Full limitations apply. W-2 wage tests and SSTB rules are fully active.

2024 thresholds. Adjust annually for inflation.

The SSTB problem

Here is where many freelancers hit a wall. The IRS designates certain businesses as "Specified Service Trades or Businesses" (SSTBs). For SSTBs, the QBI deduction phases out entirely at higher income levels.

SSTB categories include:

!Health (doctors, dentists, therapists)
!Law
!Accounting
!Actuarial science
!Performing arts
!Consulting
!Athletics
!Financial services
!Brokerage services
!Any business where the principal asset is the reputation/skill of its owner

That last one ("reputation or skill of its owner") is intentionally broad. Consultants, coaches, speakers, and certain other service businesses can fall into this bucket. If your business is an SSTB and your income is above the phase-out threshold, you may not qualify for the deduction at all.

However: engineers, architects, and certain tech businesses are specifically excluded from SSTB classification. A software developer building products is likely not an SSTB. A developer who primarily provides consulting services may be.

What the deduction actually does

An example for someone under the income threshold with $100,000 in net business income, filing single:

Net business income (QBI)$100,000
QBI deduction (20%)($20,000)
Standard deduction($15,000)
Taxable income$65,000
Without QBI, taxable income would be$85,000
Approximate tax savings (22% bracket)~$4,400

Current status

The QBI deduction is currently set to expire after 2025. Congress has been expected to extend it, and legislation to do so has been discussed, but it is worth noting that this deduction may change. Your CPA will know the current status when you file.

What to do

If your income is under the phase-out threshold and your business is not an SSTB, your tax software should calculate and apply the QBI deduction automatically. Make sure you are reporting your business income on Schedule C (or your partnership/S-corp return) so the software can capture it.

If you are near or above the phase-out threshold, or if you are unsure whether your business qualifies as an SSTB, this is worth a specific conversation with a CPA. The deduction can be significant enough that optimizing for it (through business structure or income timing) is worthwhile.