How Does the Qualified Business Income Deduction Affect Self-Employment Tax?
The Qualified Business Income Deduction (QBI deduction), also known as the Section 199A deduction, is a tax benefit available to eligible self-employed individuals and pass-through business owners. However, it does not directly reduce self-employment tax (SE tax), which is calculated based on net earnings from self-employment.
Key Points:
- QBI deduction reduces taxable income for federal income tax purposes, but not self-employment tax. Self-employment tax is based on net earnings before applying the QBI deduction.
- Self-employment tax is calculated using Form 1040, Schedule SE, which uses net earnings from self-employment (before QBI deduction).
- The QBI deduction is claimed on Form 1040, line 13a (for individuals) and is based on income thresholds and business type.
- For 2025, the QBI deduction is available if taxable income before the deduction is $197,300 or less ($394,600 if married filing jointly).
- Even if you claim the QBI deduction, you must still pay self-employment tax on your full net earnings from self-employment.
Important Considerations:
- The QBI deduction is not available for certain service-based businesses (e.g., health, law, accounting) if income exceeds thresholds.
- You must use Form 8995 or Form 8995-A to compute the deduction if eligible.
- Self-employment tax is not reduced by the QBI deduction because it is based on earnings, not taxable income.
Source:
Form 1040 Instructions
Publication 505
Publication 54
Schedule K-1 (1065) Instructions
Publication 225
Disclaimer: Always verify details with official IRS forms and instructions or consult a tax professional. OLT (Online Taxes) provides guidance based on current IRS publications and forms.