How the QBI deduction works

The qualified business income deduction, often called QBI or section 199A, is a deduction against taxable income, not a credit against tax. In the simple case it is

$$D = 0.20 \times \text{QBI}$$

On $80,000 of QBI, $D$ is $16,000. On $25,000 of QBI, $D$ is $5,000. The deduction lowers the income that enters the stacked schedule on how tax brackets work. It does not lower self-employment tax on how self-employment tax works.

QBI is generally net profit from a pass-through trade, after some add-backs and haircuts. W-2 wages as an employee are not QBI.

Once taxable income clears a threshold, a wage-and-property test can cap the deduction, and specified-service trades can lose it. Those thresholds move. This sheet keeps the 20 percent line visible by staying under those tests.

The paycheck calculator on this page is an employee stub. A QBI filer is usually on a pass-through return, not that stub. It is here because both pages are about how a dollar of earned income becomes tax.

How effective tax rate works is the average after the deduction has cut taxable income. Pre-tax dollars are a different timing idea.

The deduction does not reduce the 15.3 percent self-employment tax identity on this site. It is an income-tax deduction. A sole proprietor can owe SE tax on net and still take QBI on the income-tax side, subject to the tests.

Partnership and S-corporation rules change what counts as QBI and what counts as wages. Those entity choices are outside this percent.

The two teaching rows are $80,000 of QBI to a $16,000 deduction and $25,000 of QBI to a $5,000 deduction, both at 20 percent with no cap. They are not a specified-service determination, not a wage-and-property cap, and not this year's threshold. This is educational material, not financial advice.