What Is It, and How Does It Work?

The Qualified Business Income (QBI) deduction sounds like a mouthful. Most creators and freelancers just call it the QBI deduction or Section 199A. It came out of the 2017 Tax Cuts and Jobs Act and it lets self employed people deduct up to 20% of their business income. That is a big deal. If you made $80,000 in profit last year, you might be able to knock $16,000 off your taxable income.

This is not a tax credit that gives you money back. It is a deduction that lowers the income the IRS taxes you on. And it is only for pass through businesses like sole proprietors, partnerships, LLCs, and S corps. W-2 wages do not count.

Who Qualifies?

Most freelancers, contractors, and creators count as sole proprietors by default. That makes them eligible. Partnerships, LLCs taxed as partnerships, and S corps are also in. The only major group excluded are C corporations and people who only earn W-2 wages.

But there are income limits. For 2024, if your taxable income is under $191,950 as a single filer or $383,900 as a married filing jointly, you get the full deduction. If you are above that range, the deduction phases out, and once you hit $241,950 single or $483,900 joint, you may get nothing depending on your line of work.

The Catch with Service Businesses

The IRS singles out “Specified Service Trades or Businesses” or SSTBSs. These are fields where the main asset is the reputation or skill of the owner. That includes health, law, accounting, consulting, performing arts, athletics, financial services, and a few others.

If you are in one of these categories and your income is above the threshold, the deduction phases out fast. A lawyer making $500,000 cannot take the QBI deduction. But a plumber making the same amount might still qualify if they meet the wage and property rules.

Creators land in a gray zone. If your income depends mainly on your personal brand, the IRS might treat you like an SSTB. That means the deduction could vanish once you earn enough. If you sell products or run a studio with employees, you may be in a safer category.

How the Math Works

At its core, the QBI deduction is the smaller of two numbers:

• 20% of your qualified business income (plus some REIT dividends or partnership income if you have those), or
• 20% of your taxable income minus capital gains

If you made $100,000 in qualified business income and your taxable income is the same, you can deduct $20,000. If you also had $10,000 in capital gains, then the second formula might limit you to a smaller deduction.

Above the income thresholds, other limits kick in. the deduction can be capped based on either 50% of W-2 wages paid by the business, or 25% of W-2 wages plus 2.5% of qualified property like equipment or real estate. That means if you have no employees and no property, your deduction might shrink once you cross the line.

The New 2025 Changes

The deduction was originally set to expire in 2025. The One Big Beautiful Bill Act made it permanent and even expanded it. Starting in 2025, the thresholds increase to $197,300 single and $394,600 joint, with higher phase out ranges. There is also now a $400 minimum deduction for anyone with at least $1,000 in business income who materially participates. That means small creators will not be shut out completely.

The phase out ranges also got wider. For singles it is not $75,000, and for joint filers it is $150,000. That gives more breathing room before the deduction disappears.

Rental Real Estate Safe Harbor

Another group that can benefit are freelancers who also invest in real estate. Rental income can qualify if it counts as a trade or business. The IRS set up a safe harbor: you need separate books for rental, at least 250 hours of rental services per year (or in 3 of 5 years), and detailed records of time, services, and who did them.

Why This Matters for Freelancers

The QBI deduction is one of the biggest breaks for self employed people in the tax code. It can drop your taxable income by thousands. But it does not reduce self employment tax. You still owe the 15.3% on your net earnings. The deduction only applies to income tax.

That means planning matters. If you are close to the thresholds, you might hold off on extra income until next year, or make a retirement contribution to lower taxable income or preserve the deduction. S corps may use salary and distribution splits to manage how much income qualifies.

Best Practices

• Keep clear records of your business income and expenses.
• Track your taxable income against the thresholds.
• If you are in an SSTB, plan carefully once you get close to the phase out range.
• Consider retirement contributions and entity structure as tools to stay eligible. Use Form 8995 if your income is below the limits, or 8995-A if it is above.

P.S. Beluga can actually help with all of these!

Bottom Line

The QBI deduction is simple in theory and complicated in practice. At its best, it lets freelancers, creators, and small business owners deduct 20% of their income and keep more money. At its worst, the maze of thresholds, wage rules, and SSTB restrictions can make it vanish right when you need it most.

If you are making real money from your work, it is worth understanding the basics. Because missing out on the QBI deduction is like walking past a stack of cash that legally has your name on it.

Keep on Creating!

— The Beluga Team