Running a small or mid-sized business is rewarding—but when tax season arrives, the rules can feel overwhelming. One of the most valuable tax breaks available today is the Qualified Business Income (QBI) Deduction, sometimes referred to as the 20% pass-through business deduction. This tax benefit can allow eligible owners to deduct up to 20% of their business income, potentially saving thousands of dollars every year.

But not every company qualifies, and the rules vary depending on your structure, income, business of performing services and industry. In addition, understanding the net amount of qualified items and how qualified items of income are calculated can be critical to determining eligibility.

So, how do you know if your business qualifies for this deduction? And more importantly—how can you position your company to take advantage of tax savings while staying compliant?

Let’s break it down step by step.

What Is the Qualified Business Income Deduction?

The QBI Deduction was created under the Tax Cuts and Jobs Act (TCJA) of 2017. It allows eligible taxpayers to deduct up to 20% of their Qualified Business Income from certain pass-through entities, including:

Sole proprietorships
Partnerships
S corporations
Some trusts and estates

Qualified Business Income refers to the net amount of qualified income, gains, deductions, and losses from your trade or business. Importantly, wages you earn services as an employee do not qualify—this tax break is specifically for business owners with eligible pass-through income.

It’s worth noting that this deduction is in addition to the standard deduction or itemized deductions—it’s not an either/or choice. For many small businesses, this extra savings opportunity can make a major difference at tax time. Understanding the amount of qualified items and qualified trade or business under section 199a can help ensure that your tax filing accurately reflects your eligibility.

Why This Deduction Matters for Small Business Owners

For many owners, taxes represent one of the largest expenses. The section 199a deduction acts as a built-in discount on taxable income, which means:

Lower taxable income = reduced income taxes
More available cash to reinvest in your company
Potentially higher employee benefits or operating capital

For example, imagine a small landscaping business that brings in $200,000 in Qualified Business Income. With this deduction, the owner could reduce taxable income by $40,000. At a 22% tax bracket, that means nearly $8,800 in tax savings.

For a growing company, that money could go toward:

Expanding marketing campaigns
Hiring additional employees
Offering stronger health benefits
Purchasing new equipment

That’s why the QBI Deduction is considered one of the most powerful tax breaks for entrepreneurs today. It’s especially important to correctly account for items of income gain and guaranteed payments, which can affect your overall deduction.

Who Qualifies for the Deduction?

Your eligibility depends on three main factors:

1. Your Business Structure

Pass-through entities are eligible. qbi includes:

Sole proprietorships
Partnerships
LLCs taxed as partnerships or sole proprietorships
S corporations

C corporations, however, are excluded. They already benefit from a separate 21% corporate tax rate.

It’s also important to consider unadjusted basis in qualified property, which can play a role if your performance of services business pays out guaranteed payments to partners or owners.

2. Your Taxable Income

For 2025, the income thresholds are:

$383,900 for married filing jointly
$191,950 for single filers

If your income falls below these amounts, you can usually take the full 20 percent deduction without limits. If you’re above these thresholds, things get more complex dealing in securities, particularly for qualified trade or business under section 199a in high-income brackets.

3. Your Industry or Trade

Some industries fall into what the IRS calls Specified Service Trades or Businesses (SSTBs). These include professions such as:

Health care
Law
Accounting
Consulting
Athletics
Financial services
Performing arts

If you operate in one of these fields and your income is above the threshold, your deduction phases out or may be eliminated entirely. Correctly categorizing your business as a qualified trade or business under section 199a ensures that your amount of qualified items is maximized.

Examples of Businesses That Qualify

Sometimes the rules feel abstract—so let’s ground them with real-world examples:

A restaurant owner with $150,000 in taxable interest income could deduct 20% of QBI—reducing taxable income by $30,000.
A small manufacturing firm structured as an S corporation could deduct the full amount if under the threshold.
A freelance designer earning $75,000 as a sole proprietor would qualify.

Even microbusinesses can benefit. For instance, an independent online seller earning $40,000 annually could still reduce taxable income by $8,000. Correctly reporting qualified items of income and any guaranteed payments is key to ensuring you receive the full benefit.

The IRS is clear that the business must meet the definition of a 162 trade or business for purposes of claiming the deduction. This prevents purely investment income from being counted.

Who May Not Qualify (or Face Limits)

While many small businesses do qualify, some do not—or face reduced benefits:

High-income professionals in restricted industries: A lawyer making $400,000 may see their deduction phased out completely.
C corporations: They already have the 21% flat rate, so they don’t qualify.
Employees: If you’re paid wages by an employer but don’t own the business, you can’t claim it.

Additionally, failure to properly track partnership interests and commodities, items of income gain or net amount of qualified income may result in a lower deduction than anticipated.

How the Deduction Is Calculated

The basic calculation is 20% of your QBI. But there are special rules if your income exceeds the threshold.

Wage and Property Limitation

If your taxable income is higher, the deduction is limited to the greater of:

50% of W-2 wages paid by the business, OR
25% of W-2 wages + 2.5% of unadjusted basis of qualified property.

SSTB Phase-Out

If your business is a specified service trade and your income is over the limit, the deduction gradually phases out until it disappears completely.

This is why payroll planning matters. If your company doesn’t pay reasonable wages or track guaranteed payments, you may not qualify under the wage limitation rules.

Why Payroll and HR Management Matter

Here’s where many owners run into trouble: your payroll setup directly impacts your eligibility for the QBI Deduction.

For example:

If your business doesn’t pay W-2 wages, you may fail the limitation test.
Misclassifying employees as contractors could reduce your deduction and attract IRS audits.
Weak payroll recordkeeping can lead to inaccurate filings, affecting the net amount of qualified income you report.

Even if you have an accountant preparing your taxes, your payroll strategy throughout the year plays a huge role in determining whether you qualify.

How NetPEO Helps You Maximize Tax Savings

NetPEO is not a PEO itself—we are a PEO broker in united states that connects your business with the right HR outsourcing partner. The right PEO can ensure your payroll, compliance, and HR systems are aligned with IRS rules—helping you maximize deductions like the QBI.

Here’s how NetPEO adds value:

✅ Accurate Payroll Management – Properly tracks W-2 wages for deduction eligibility.
✅ Correct Employee Classification – Avoids costly mistakes that disqualify you.
✅ Compliance Support – Keeps your business aligned with federal and state laws, ensuring income taxes are minimized legally.
✅ Cost Savings – A PEO can reduce benefits and workers’ comp costs.
✅ Peace of Mind – You focus on growth while HR experts handle compliance.

This makes NetPEO more than just a service—it’s a strategic partner for lowering costs and staying IRS-compliant, especially when managing qualified items of income or tracking the amount of qualified items that feed into your deduction.

Common Mistakes That Lead to Lost Deductions

Mixing wages with business income – Owners often confuse their salary with business profits.
Not paying W-2 wages – Some S corporation owners try to minimize payroll, which can backfire.
Disorganized books – Without accurate accounting, deductions may be denied.
Ignoring industry rules – High-income service professionals often assume they qualify, only to lose out.
Lack of HR oversight – Small mistakes in payroll or compliance can cost thousands.

Properly accounting for items of income gain, guaranteed payments, investment management trading and unadjusted basis is essential to avoid these errors.

How to Find Out if You Qualify

To determine eligibility, review:

Your entity type
Your industry classification
Your taxable income
Your payroll structure

Your accountant will handle the tax filing itself, but your HR setup—especially payroll—directly influences whether you can claim the deduction.

That’s why partnering with NetPEO to find the right PEO is so valuable: we ensure your HR operations are structured for compliance and savings, including qualified trades or businesses and the net amount of qualified items.

Section 199A and Future Planning

Now let’s talk long term. section 199a eduction—introduced under Section 199A—is scheduled to expire in 2026 unless extended by Congress.

This means the next few years are a crucial window for maximizing this benefit. With the right payroll and HR systems in place, you can lock in savings while they last. Understanding guaranteed payments and tracking qualified items of income throughout the year ensures you’re fully prepared.

These distinctions are important because the IRS specifically looks at whether your company is engaged in a business for purposes of Section 162 trade rules or falls under the restricted SSTB list.

Frequently Asked Questions (FAQs)

1. Can I claim the QBI Deduction if I have no employees?

Yes, you may still qualify, but if your income is above the threshold, the wage limitation could reduce your deduction.

2. Does rental income qualify?

Sometimes. If your rental activity rises to the level of a trade or business, it may qualify. Properly tracking the amount of qualified items in rental income is critical.

3. What if I own multiple businesses?

The IRS allows aggregation in some cases, meaning you may combine businesses to calculate your deduction.

4. How do I make sure I don’t lose this deduction?

By ensuring payroll, employee classification, and compliance are handled correctly—areas where a PEO can help, especially for items of income gain and net amount of qualified calculations.

Final Thoughts: Maximize Tax Savings with the Right Partner

The Qualified Business Income Deduction can be a game-changer for small and mid-sized businesses. But qualification depends on more than just your tax return—it’s also tied to how you structure payroll, classify workers, and manage compliance.

That’s where NetPEO comes in.

Through our network of PEO partners, we help determine if your business entity type (S-corp, partnership, etc.) is tax-efficient for Section 199A and section 162 trade rules. We connect you with the right PEO partner—so your HR systems are streamlined, your payroll is accurate, and you have the best chance of maximizing deductions while avoiding IRS headaches. Correctly tracking qualified items of income, guaranteed payments, and unadjusted basis can make a significant difference.

👉 Don’t leave money on the table. Let NetPEO help you find the PEO that positions your business to benefit from deductions like Section 199A.

Ready to find out if your business qualifies for the QBI Deduction—and how NetPEO can help you maximize savings?

👉 Contact us today for a free consultation and discover how the right PEO can transform your HR, payroll, and compliance strategy.

Does My Business Qualify for Section 199a (Qualified Business Income Deduction)?