How to Calculate the 20% QBI Deduction

By Priya Raman, Contributing Writer, Policy & Regulation
Updated June 17, 2026

Step 1: Calculate 20 percent of qualified business income (QBI). Step 2: Apply the overall taxable income cap (20 percent of taxable income minus net capital gains). Step 3: If above the income threshold, apply the W-2 wage limit for non-SSTBs, or the SSTB phase-out for service businesses. Step 4: Take the smaller result from all of the above. Tax calculations are complex and this is educational information. Use the QBI calculator for an estimate and consult a CPA for your actual return.

Below the income threshold: the simple calculation

If your taxable income before the QBI deduction falls below the lower threshold (confirm the current-year figure with the IRS), the calculation for most filers is:

QBI deduction = lesser of: (a) 20% of QBI, or (b) 20% of (taxable income minus net capital gains)

Example: QBI of $100,000, taxable income before the QBI deduction of $120,000, no capital gains. 20 percent of QBI = $20,000. 20 percent of taxable income = $24,000. Deduction = $20,000 (the lesser of the two). That is the entire calculation for most below-threshold filers.

Above the threshold: adding the W-2 wage limit

For non-SSTB businesses above the upper threshold, the deduction cannot exceed the greater of:

• (a) 50 percent of W-2 wages paid by the business, or
• (b) 25 percent of W-2 wages paid by the business, plus 2.5 percent of the unadjusted basis immediately after acquisition of all qualified property held by the business

Example: QBI of $200,000, W-2 wages paid by the business of $80,000, no qualified property. Prong (a) = 50% x $80,000 = $40,000. Prong (b) = 25% x $80,000 + 0 = $20,000. The greater of the two is $40,000. Since 20 percent of QBI is also $40,000, the deduction is $40,000, then subject to the overall taxable income cap.

A sole proprietor with no employees and no depreciable property above the threshold gets a $0 W-2 wage limit under both prongs. The QBI deduction is $0. This is a common and unpleasant surprise for high-earning freelancers and independent contractors.

In the phase-in range

Between the lower and upper thresholds, the W-2 wage limit phases in proportionally. The formula measures how far into the $75,000 (single) or $150,000 (MFJ) phase-in range your income falls and applies a proportional restriction. At 60 percent through the range, 60 percent of the wage limit applies. Form 8995-A handles this calculation on the actual return. The QBI calculator applies the phase-in math automatically.

The overall taxable income cap

Regardless of all other calculations, the QBI deduction cannot exceed 20 percent of taxable income minus net capital gains and qualified dividends. This prevents the deduction from reducing taxable income below zero and limits the benefit to what a straight 20 percent rate reduction on business income would produce.

Aggregation elections

Owners of multiple pass-through businesses may be able to aggregate them for QBI purposes, pooling W-2 wages and qualified property across businesses to satisfy a wage limit that no single entity could meet alone. Aggregation elections carry specific requirements, must be consistently applied in all subsequent years, and need to be disclosed on the return. Consult a CPA before making an aggregation election.

Related reading

• What is the QBI deduction (Section 199A)?
• Who qualifies for the QBI deduction?
• QBI income thresholds and phase-out
• What is a specified service trade or business (SSTB)?
• QBI deduction for rental property