The QBI deduction: why your salary shrinks it

What the deduction is

Individuals may be able to deduct up to 20% of their net qualified business income from a trade or business, including income from a pass-through entity such as a sole proprietorship, a single-member LLC or an S corporation. A 2025 law (P.L. 119-21) made it permanent.

For a sole proprietor, QBI is the business profit, reduced by the deductible part of self-employment tax, the self-employed health insurance deduction and retirement plan contributions. From 2026, a minimum deduction of $400 applies when active QBI is at least $1,000.

How the S election changes it

QBI does not include amounts received as reasonable compensation from an S corporation. So after the election, your salary leaves QBI: only the S corporation’s profit after your salary counts. The deduction shrinks by about 20% of your salary.

The smaller deduction raises your income tax. The calculator shows it on line 5, the change in your federal income tax at your bracket. Here is the line-by-line result for a Texas LLC with $120,000 of profit and a $60,000 salary, single, in the 22% bracket:

Line 5 includes the QBI effect. It is part of why a higher salary costs more than its payroll tax alone: each extra dollar of salary adds payroll tax and also takes 20 cents out of the deduction. How to pay yourself shows how the total changes as the salary moves.

The limits above the threshold

For 2026, the limits start once taxable income passes $201,750 ($403,500 married filing jointly, $201,775 married filing separately) and phase in over the next $75,000 ($150,000 joint). Below the threshold, none of the limits apply.

• The wage limit. Above the range, the deduction can’t exceed the greater of 50% of the business’s W-2 wages, or 25% of W-2 wages plus 2.5% of the business’s qualified property.
• Specified service businesses. Services in health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading or dealing in certain assets, or any business whose main asset is the reputation or skill of its owners or employees. Above the threshold and phase-in range, these businesses stop qualifying.

The calculator flags it when your numbers may be above the threshold, because line 5 can then be off.

Sources

• Instructions for Form 8995 (2025)
• P.L. 119-21, sec. 70105(a)(1), 139 Stat. 161
• Rev. Proc. 2025-32, sec. 4.26
• Instructions for Form 8995-A (2025)
• Instructions for Form 8995 (2026), early-release DRAFT (Jun 17, 2026), What’s New
• IRS, Section 199A qualified business income deduction FAQs (page last reviewed 12-May-2026)

Every figure was read on an official page and checked a second time. Checked October 24, 2026. How we check facts.

An explanation of public rules, not tax advice.