What Is QBI Deduction? A Simple Guide for Self-Employed Creators

Understanding what is QBI deduction can lead to big savings during tax season. This powerful tax break allows you to deduct up to 20% of your business income, but the rules can get complicated, especially for creators, freelancers, and digital entrepreneurs.

What Is the QBI Deduction?

The Qualified Business Income (QBI) deduction is a tax benefit that allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income (QBI) from their taxable income. Introduced by the Tax Cuts and Jobs Act, this deduction applies to income from pass-through entities such as sole proprietorships, partnerships, and S corporations.

Unlike tax write offs for expenses, this deduction reduces your taxable income without requiring you to spend anything. For creators and freelancers who receive self-employment income, especially those providing services like content creation, coaching, or consulting, the QBI deduction can make a noticeable difference in reducing your overall income tax.

Who Qualifies for the QBI Deduction?

You may qualify for the QBI deduction if you are engaged in a qualified trade or business and report income through a pass-through entity. This includes:

• Sole proprietors
• S corporations
• Partnerships
• Some single-member LLCs

To be eligible self-employed, your business must be domestic, actively earning revenue, and not excluded under specific IRS rules. The Internal Revenue Service outlines that the deduction is subject to income limits, which determine how much of the 20% deduction you can claim.

For tax year 2024, the income threshold is:

• $191,950 for single filers
• $383,900 for joint filers

If your net amount of taxable income exceeds these levels, and you operate a specified service trade or business, you may enter a phase-in range where the deduction starts to reduce. Once you’re above the upper limit, your deduction may be partially or completely phased out depending on the business type and wages paid.

What Income Counts as Qualified Business Income?

Your QBI generally includes the net income from your business, after deducting business expenses, but before applying other tax factors. This typically comes from self-employment activity or small business operations where income is reported on Schedule C.

QBI includes:

• Income from sole proprietorships
• Share of income from partnerships or S corps
• Some rental income if it qualifies as a trade or business

QBI excludes:

• Capital gains and losses
• Dividends, including certain dividends from stocks
• Qualified REIT dividends, unless part of a separate QBI component
• Income from qualified publicly traded partnerships (PTPs), unless it meets IRS criteria
• Guaranteed payments to partners
• Income from real estate investment trusts unless allowed through special rules
• Other income like annuities or interest not related to the business
• Items not effectively connected with a U.S. business
• Self-employment tax adjustments
• Contributions to retirement or qualified items such as health insurance

Your QBI must come from providing services or selling goods that are part of an active, domestic business. Also, if you rent out business property, that may qualify as QBI if it meets certain criteria.

How Do I Calculate My QBI Deduction?

While the deduction is often 20% of your QBI, the calculation may vary based on your income level, business structure, and wages paid to employees. If your income is below the IRS income limits, you can typically take the full 20% without much complication.

Here’s how to calculate it:

1. Determine your QBI
   Subtract expenses from business revenue. Exclude items like capital gains, dividends, and other disqualified income.
2. Apply the 20% rule
   Multiply your QBI by 20% to find your preliminary deduction amount.
3. Check income thresholds
   If your income exceeds the phase-in range, you may need to apply limits based on W-2 wages paid and the unadjusted basis immediately after acquisition (UBIA) of qualified property used in the business.
4. Consider additional adjustments
   If you’re part of a qualified publicly traded partnership, receive REIT dividends, or deal with ptp income, special rules may apply. You must also factor in reasonable compensation if you are an S corp owner.
5. Use the proper form
   Most filers use Form 8995, while more complex cases or those above income limits use Form 8995-A.

This qualified business income deduction is only available for tax years beginning after January 1, 2018, and is currently set to expire after 2025 unless extended.

Do OnlyFans Creators Qualify for the QBI Deduction?

In most cases, yes. If you are self-employed and file a Schedule C for your income from platforms like OnlyFans, you may qualify for the QBI deduction. Since your income is classified as self-employment income, and you are providing services, you meet the foundational criteria.

However, there are caveats. Some creators may fall under the IRS category of specified service trades or businesses, which includes fields where the main asset is the reputation or skill of the owner. If that’s the case, your eligibility may depend on where your income falls relative to the IRS thresholds.

OFCPA works with digital creators every day to help them understand these classifications and make sure their tax return reflects the most advantageous treatment possible.

What Is a Qualified Trade or Business?

A qualified trade or business is a domestic, active business that earns income connected to U.S. operations and does not fall into an excluded category. If you’re engaged in providing services or selling goods through a self-managed brand or business, you likely qualify.

Excluded businesses (also known as Specified Service Trades or Businesses, or SSTBs) include:

• Law
• Health
• Financial services
• Consulting
• Investment management
• Athletics or performing arts

If your income falls within or below the IRS income limits, you may still claim the deduction in full, even if you’re in one of the excluded fields.

What Forms Do I Need for the QBI Deduction?

To claim the QBI deduction, you’ll need to file:

• Form 1040 for your personal taxes
• Schedule C for your business income
• Form 8995 (or 8995-A if your income is above the threshold)

You may also need to keep records of:

• W-2 wages (if you have employees)
• UBIA of qualified property
• PTP income or qualified REIT dividends
• Any other items that affect your QBI calculation

Make sure to check IRS tax rules each year, as thresholds and forms can change depending on the tax code and your situation.

How the QBI Deduction Helps Creators Save Money

For creators and other eligible self-employed individuals, the QBI deduction can reduce your taxable income without needing to spend more or itemize deductions. If you combine it with the standard deduction and other common tax deductions like home office expenses, qualified retirement plans, or equipment costs, the savings can be substantial.

This deduction also works alongside strategies that reduce your self-employment tax, helping you manage both federal income taxes and Social Security/Medicare liabilities. It’s a powerful way to keep more of your income in your pocket without changing how you operate your business.

FAQs

What is the purpose of the QBI deduction?

The QBI deduction was created to support small business owners and self-employed individuals by giving them a tax break similar to that of corporations. It reduces your income tax by allowing you to deduct up to 20% of your qualified business income, which lowers your overall tax liability.

How do I calculate my QBI deduction?

Start with your net amount of QBI, typically your self-employment income after expenses. Multiply that by 20%. If your income exceeds certain thresholds, apply the wage/property limitations. Use Form 8995 or Form 8995-A, depending on your situation, and consult with a tax professional if you have ptp income or qualified publicly traded partnership involvement.

What is considered a qualified trade or business?

Any domestic business that earns income through regular operations and does not fall under the specified service trade categories is considered a qualified trade or business. That includes creators, consultants, and freelancers, unless their income is high enough to trigger phase-outs under SSTB classifications.

What is the difference between ordinary and qualified business income?

Ordinary income includes all earned income, while qualified business income is the portion of that income eligible for the 20% QBI deduction. QBI excludes things like capital gains, dividends, certain assets, and other income not directly tied to your business activity.

Conclusions

The QBI deduction can be a major tax-saving opportunity for self-employed professionals and creators who understand the rules. Whether you’re offering consulting, managing a digital brand, or running a content-based business, this deduction could reduce your tax bill significantly, if your business qualifies and your income falls within the allowable range.

However, it’s not always straightforward. Factors like business classification, reasonable compensation, qualified items, and tax rules can complicate things. This is where working with experts can make a difference.

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