Quick answer: the qualified business income (QBI) deduction, from Section 199A of the tax code, lets many sole proprietors and single-member LLC owners deduct up to 20% of their net business income on their federal income tax return. You do not need to itemize to claim it. Most side hustlers use the simple Form 8995, which applies when 2026 taxable income before the deduction is $201,750 or less ($403,500 for married couples filing jointly), according to the IRS draft 2026 instructions. Starting in 2026, people with at least $1,000 of QBI from businesses they actively run get a minimum deduction of $400. It lowers income tax only, not self-employment tax.
Most tax breaks for small businesses require you to spend money first: buy the equipment, pay the subscription, drive the miles. The qualified business income deduction is different. It is a percentage of the profit itself, and it is available to many people who run a small business on the side of a regular job.
Because it is calculated in the background by tax software, a lot of side hustlers claim it without knowing what it is, and others miss it because they assume it is only for larger companies. This guide explains how it works in plain terms. It is part of our main guide on side hustle ideas and how to start and pay taxes on one.
Sources: Internal Revenue Service, “Qualified business income deduction” and its FAQs, Instructions for Form 8995 (2026 draft) and Form 8995-A, Revenue Procedure 2025-32 (2026 inflation adjustments); Internal Revenue Code Section 199A as amended by Public Law 119-21 (enacted July 4, 2025); IRS Publication 535 and Publication 334. Figures change annually and this is general information, not tax advice. Checked October 2026.
What the QBI Deduction Is
The deduction was created by the 2017 tax law and lives in Section 199A of the Internal Revenue Code. The IRS describes it as allowing eligible self-employed and small business owners to deduct up to 20% of their qualified business income, plus 20% of certain real estate investment trust dividends and publicly traded partnership income.
It was originally scheduled to expire after 2025. The 2025 budget law, Public Law 119-21, made it permanent and added a minimum deduction starting with the 2026 tax year, according to the IRS revenue procedure covering 2026 inflation adjustments.
Three features make it unusual:
- It is not an itemized deduction. You can take the standard deduction and still claim QBI.
- It does not reduce adjusted gross income. It is subtracted after AGI is calculated, on Form 1040 line 13.
- It does not change self-employment tax. That tax is figured on net earnings before this deduction.
Who Can Claim It
The IRS says the deduction is available to individuals with income from a qualified trade or business operated as a sole proprietorship, partnership, S corporation, trust or estate. For a typical side hustle, that means:
| Setup | Eligible for QBI? |
|---|---|
| Sole proprietor filing Schedule C | Generally yes |
| Single-member LLC taxed as a disregarded entity | Generally yes, the same as a sole proprietor |
| Multi-member LLC taxed as a partnership | Generally yes, through the partner’s share |
| S corporation owner | Yes on the business income share, but not on the salary paid to yourself |
| C corporation | No, the corporation pays its own tax |
| W-2 employee wages | No, wages are never QBI |
A hobby does not qualify. Income from an activity the IRS treats as a hobby is taxable but is not income from a trade or business, so no QBI deduction applies. Our explainer on whether your side hustle is a hobby or a business covers the IRS factors.
How Qualified Business Income Is Figured
QBI is not simply the bottom line of Schedule C. The IRS FAQs explain that QBI is the net amount of qualified items of income, gain, deduction and loss from the business, and that certain deductions attributable to the business reduce it. For a sole proprietor, the most common ones are:
- The deductible half of self-employment tax
- The self-employed health insurance deduction
- Contributions to self-employed retirement plans such as a SEP IRA or solo 401(k)
Several items are excluded from QBI entirely, including capital gains and losses, most interest income not tied to the business, and wages earned as an employee.
A simple illustration
Using hypothetical round numbers to show the order of operations:
- Schedule C net profit is $10,000.
- The deductible half of self-employment tax is about $706.
- QBI is roughly $10,000 – $706 = $9,294.
- Twenty percent of that is about $1,859.
That last figure is then compared with a second limit: 20% of taxable income before the QBI deduction, minus net capital gains. The deduction is the smaller of the two. For most people with a full-time job and a modest side hustle, taxable income is high enough that the business-income figure is the one that applies.
The tax savings are the deduction multiplied by your marginal rate, not the deduction itself. A $1,859 deduction for someone in the 22% bracket saves roughly $409 in federal income tax.
The 2026 Thresholds and Why They Matter
Below a certain level of taxable income, the calculation is the simple one above. Above it, extra limits begin to apply. Revenue Procedure 2025-32 sets these amounts for 2026:
| Filing status | Threshold (simple calculation below this) | End of phase-in range |
|---|---|---|
| Married filing jointly | $403,500 | $553,500 |
| Married filing separately | $201,775 | $276,775 |
| All other returns | $201,750 | $276,750 |
For comparison, the 2025 thresholds were $197,300 for most filers and $394,600 for joint filers. The phase-in range also became wider under the 2025 law, which softens the drop-off for people just over the threshold.
The vast majority of weekend and evening businesses never reach these levels. Even so, it is worth knowing what changes above them.
Specified service trades or businesses
Above the threshold, the deduction phases out for a “specified service trade or business,” or SSTB. The IRS list includes health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services and brokerage services, plus any business where the principal asset is the reputation or skill of its owners. Once taxable income passes the top of the phase-in range, an SSTB gets no QBI deduction at all.
Wage and property limits
For businesses that are not SSTBs, income above the threshold brings in a limit based on W-2 wages the business pays and the unadjusted basis of its qualified property. A one-person side hustle with no employees and little equipment can see its deduction reduced significantly at that point.
The New $400 Minimum Deduction
Starting with tax years beginning after December 31, 2025, Section 199A includes a floor. The IRS draft 2026 instructions for Form 8995 explain that taxpayers whose aggregate QBI from all qualified businesses in which they materially participate is at least $1,000 receive a deduction of at least $400.
What that means in practice:
- It helps the smallest businesses most. Someone with $2,000 of QBI would otherwise get a $400 deduction anyway, but someone with $1,500 would get $300 under the normal 20% math, and the floor raises that to $400.
- Material participation is required. The business has to be one you actively run, using the passive activity rules in Section 469(h). Passive investments do not count toward the $1,000.
- The amounts will be indexed. Both the $400 and $1,000 figures adjust for inflation for tax years after 2026.
The draft instructions place the minimum on a new line of Form 8995, so tax software should handle it automatically once you enter Schedule C correctly.
Claiming It: Form 8995 vs Form 8995-A
The IRS uses two forms:
- Form 8995 (Simplified Computation) is for people whose taxable income before the QBI deduction is at or below the threshold and who are not patrons of agricultural cooperatives. Most side hustlers fit here.
- Form 8995-A is for everyone above the threshold, and it applies the SSTB, wage and property rules.
Your deduction lands on Form 1040, line 13. If you file Schedule C, enter your business on Form 8995, report the QBI figure, and the form does the 20% calculation and the taxable-income comparison.
Losses carry forward
If your side hustle lost money, the IRS explains that the net QBI loss carries forward and reduces QBI in the next year. That matters for new businesses that spend heavily in year one. A loss now means a smaller deduction later, so keep the prior year’s Form 8995 handy.
Mistakes That Shrink or Lose the Deduction
The QBI deduction is generous, but small errors can reduce it or cost it entirely.
Not reporting the business at all. Income left off Schedule C produces no QBI. It also creates problems when a 1099-NEC or 1099-K shows the income to the IRS.
Treating a business as a hobby. If you report side income as “other income” rather than on Schedule C, the deduction does not apply.
Forgetting the adjustments. Tax software usually handles the half self-employment tax and retirement contribution adjustments, but manual filers sometimes calculate 20% of gross profit, which overstates the deduction.
Missing the carryforward. A loss from last year reduces this year’s QBI, and skipping it can lead to an IRS adjustment later.
Assuming it lowers self-employment tax. It does not. Budget for self-employment tax on the full net profit and make estimated payments during the year. Our guide to quarterly estimated taxes for side hustles covers the schedule.
Records That Support the Deduction
Because QBI is derived from Schedule C, the records that support your expenses also support the deduction. The IRS generally expects you to keep records that back up income and deductions for as long as the return can be examined, which is usually three years from the filing date and longer in some situations.
A short checklist keeps it manageable:
- Income records such as invoices, platform payout reports and any Forms 1099-NEC or 1099-K you receive
- Expense receipts organized by category, matching the lines on Schedule C
- A copy of each year’s Form 8995, which shows any loss carryforward into the next year
- Retirement contribution statements and health insurance premium records, since both reduce QBI
- Notes on hours worked, which help show material participation for the $400 minimum if it is ever questioned
Keeping those documents in one folder per tax year makes next spring’s return faster and gives you a clear answer if the IRS ever asks how the number was calculated.
How QBI Fits With Other Side Hustle Tax Breaks
Think of side hustle taxes as layers:
- Business expenses on Schedule C reduce profit, which lowers both income tax and self-employment tax. Our list of common side hustle tax deductions is a good checklist.
- Adjustments to income on Schedule 1, such as half of self-employment tax and retirement contributions, lower adjusted gross income.
- The standard or itemized deduction reduces taxable income.
- The QBI deduction takes up to 20% of qualified business income off what is left.
Retirement contributions deserve a note. They lower AGI and taxable income, but they also reduce QBI. For most side hustlers the retirement deduction is still worth more than the small QBI reduction it causes. Our comparison of the solo 401(k) and SEP IRA for side hustles explains the contribution rules.
Frequently Asked Questions
Can I take the QBI deduction if I take the standard deduction?
Yes. The QBI deduction is separate from the choice between standard and itemized deductions, and it is claimed on Form 1040 line 13.
Does the QBI deduction reduce self-employment tax?
No. Self-employment tax is calculated on Schedule SE from net profit before the QBI deduction.
What is the new $400 QBI minimum?
Starting in 2026, taxpayers with at least $1,000 of QBI from businesses they materially participate in get a deduction of at least $400, subject to the overall taxable income limit.
Is freelance consulting a specified service business?
Consulting is on the IRS list of specified service trades or businesses. That only matters if taxable income is above the threshold, which for 2026 is $201,750 for most filers.
Do I qualify for QBI if I have a W-2 job and a side hustle?
Yes, the business income can qualify. Your W-2 wages do not count as QBI, but they do count toward taxable income for the thresholds.
The Bottom Line
The QBI deduction rewards side hustlers simply for reporting profit correctly as a business. Keep the hustle on Schedule C, track your adjustments, use Form 8995 if you are under the threshold, and remember that starting in 2026 there is a $400 floor for active small businesses with at least $1,000 of QBI. It will not lower self-employment tax, but it can trim the income tax on every dollar you earn on the side.