The Qualified Business Income (QBI) deduction, also known as the Section 199A deduction, is a tax benefit introduced as part of the Tax Cuts and Jobs Act (TCJA) in 2017. It is designed to provide tax relief to certain pass-through businesses, including freelancers and 1099 workers who operate as sole proprietors, partnerships, S corporations, or limited liability companies (LLCs) treated as pass-through entities for tax purposes.
Here are the key points to understand about the QBI deduction and why it’s relevant for freelancers and 1099 workers:
- Tax Benefit: The QBI deduction allows eligible taxpayers to deduct up to 20% of their qualified business income from their taxable income. This means that only 80% of their business income is subject to income tax.
- Pass-Through Entities: The QBI deduction is available to individuals who receive income from qualified pass-through entities. This includes sole proprietorships, partnerships, S corporations, and certain LLCs. It does not apply to income earned as an employee.
- Eligibility Criteria: To qualify for the QBI deduction, certain requirements must be met, including having taxable income below specified thresholds, operating a qualified trade or business, and meeting other limitations based on the type of business and income. Specific rules and limitations apply, and it’s essential to consult a tax professional for accurate guidance.
- Limitations and Phase-Out: The QBI deduction is subject to limitations based on factors such as income levels, type of business, and wage and capital limitations. As income exceeds certain thresholds, the deduction may phase out or be limited, particularly for specified service trades or businesses (SSTBs) like healthcare, law, consulting, and accounting.
- Impact on Tax Liability: The QBI deduction can significantly reduce the tax liability of freelancers and 1099 workers by effectively lowering their taxable income. This deduction provides an opportunity for these individuals to keep more of their business income and potentially lower their overall tax burden.
It’s important to note that the QBI deduction is a complex provision, and its application can vary based on individual circumstances. Freelancers and 1099 workers should consult with a qualified tax professional or accountant who can provide personalized advice and help navigate the specific requirements and limitations associated with the QBI deduction.