The QBI Deduction for Side Income, Explained
If your side income is reported on Schedule C, there is a deduction you may be missing that has nothing to do with expenses: the qualified business income deduction, also called the Section 199A deduction. For many small sole proprietors, it reduces taxable income by up to 20% of their business profit, and you do not have to itemize to get it.
1. What it is
The IRS explains that many owners of sole proprietorships, partnerships, S corporations, and some trusts and estates may be eligible for a QBI deduction for tax years beginning after December 31, 2017. It allows eligible taxpayers to deduct up to 20% of their qualified business income, plus 20% of certain REIT dividends and publicly traded partnership income.
Two features make it especially relevant to side businesses:
- It is available whether you itemize deductions on Schedule A or take the standard deduction.
- It is figured separately from your business expenses, after your Schedule C profit is known.
2. What counts as qualified business income
The IRS describes QBI as the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business. For a sole proprietor, that starts with Schedule C net profit, but it is reduced by deductions attributable to the business, including the deductible part of self-employment tax, self-employed health insurance, and contributions to qualified retirement plans such as SEP and SIMPLE plans.
QBI does not include items such as capital gains or losses, interest income not allocable to the business, or wages earned as an employee. The IRS also lists tip income excluded under IRC Section 224 for tax years 2025 through 2028.
3. The overall limit
The IRS states that the deduction is limited to the lesser of the QBI component plus the REIT/PTP component, or 20% of taxable income minus net capital gain. That second cap matters if your taxable income is low relative to your business profit.
4. The income threshold
Higher earners face extra limits based on W-2 wages paid by the business, the value of business property, and whether the business is a specified service trade or business (SSTB), such as many professional services. According to the Form 8995 instructions (the 2025 edition, the latest as of October 2026), for 2025 returns these limits do not apply if taxable income before the QBI deduction is $197,300 or less ($394,600 or less for married filing jointly). In that case, even an SSTB is treated as a qualified business, and the simpler Form 8995 is generally used.
Most side businesses fall below these levels, which keeps the calculation simple.
5. A worked example
Assume a single filer with a freelance business showing $30,000 of Schedule C net profit, plus a day job, and taxable income before the QBI deduction of $60,000. Assume no capital gains, no retirement contributions, and no self-employed health insurance.
| Step | Amount |
|---|---|
| Schedule C net profit | $30,000 |
| Minus deductible part of self-employment tax | about $2,119 |
| Qualified business income | about $27,881 |
| QBI component (20%) | about $5,576 |
| Taxable income limit (20% of $60,000) | $12,000 |
| QBI deduction (the lesser) | about $5,576 |
The deduction lowers taxable income from $60,000 to about $54,424. What it saves in tax depends on your bracket.
6. A change starting in 2026
The IRS notes that for tax years beginning after 2025, the deduction is limited to the greater of the regular calculation described above or a new minimum deduction for active qualified business income, and that an active business is one in which the taxpayer materially participates. Check the current Form 8995 instructions when filing a 2026 return for how the minimum applies.
7. Claiming it
The deduction is figured on Form 8995 (or Form 8995-A for those above the threshold) and carried to your Form 1040. Tax software usually computes it from your Schedule C, but it is worth confirming the deduction appears, especially in the first year of a new side business.
8. Key takeaways
- The QBI deduction can reduce taxable income by up to 20% of qualified business income from a sole proprietorship.
- It is available whether you itemize or take the standard deduction.
- QBI is reduced by the deductible part of self-employment tax, self-employed health insurance, and retirement plan contributions.
- For 2025, extra limits do not apply below $197,300 of taxable income ($394,600 married filing jointly).
- In the example, $30,000 of profit produces a deduction of about $5,576.