Qualified Business Income Deduction: The Complete Guide for Small Businesses and How NetPEO Can Help

Posted October 2, 2025 by Sourav Hosen

Running a business isn’t easy. You work long hours, wear multiple hats, and juggle everything from payroll to HR compliance. On top of that, you face the annual headache of figuring out your taxes. But what if you could legally reduce your tax bill by thousands of dollars each year?

That’s exactly what the Qualified Business Income Deduction (QBI deduction)—sometimes called the 20% pass-through deduction—was designed to do.

Introduced under the Tax Cuts and Jobs Act of 2017, this deduction allows eligible business owners to deduct up to 20% of their qualified business income. For many entrepreneurs, that could mean keeping more of your hard-earned profits, reinvesting in your company, or simply reducing the stress of tax season.

Here’s the catch: the rules are complex. The IRS doesn’t make it simple to figure out who qualifies, how much you can deduct, or how payroll and employee management affect your eligibility. Many small businesses unknowingly miss out—leaving thousands of dollars on the table.

That’s where EinsteinHR comes in. As a PEO broker, we connect small businesses with the right Professional Employer Organizations (PEOs) to handle payroll, HR, compliance, and employee benefits. A properly structured payroll system isn’t just about staying compliant—it can directly impact whether you qualify for the QBI deduction and how much you save.

This complete guide will cover everything you need to know about the Qualified Business Income Deduction:

  • What it is and how it works.

  • Which businesses qualify.

  • How to calculate your deduction.

  • Common mistakes to avoid.

  • How payroll and HR play a critical role.

  • How NetPEO can help you maximize your tax savings while simplifying your business operations.

👉 Don’t wait until tax season surprises you. Talk to a EinsteinHR advisor today to see how the right PEO can help you keep more of your profits.

What Is the Qualified Business Income Deduction?

The Qualified Business Income Deduction (QBI) is one of the biggest tax breaks available to small businesses in the United States. It’s often called the 20% pass-through deduction because it allows certain business owners to deduct 20% of their qualified business income from their personal taxable income.

The Basics

  • Who it’s for: Owners of pass-through businesses such as sole proprietorships, partnerships, S corporations, and LLCs taxed as pass-through entities.

  • How it works: Instead of paying taxes on your entire business income, you can deduct up to 20%—meaning you only pay taxes on 80% of it.

  • Who it excludes: C corporations don’t qualify because they already pay corporate income taxes.

Example: How Much Can You Save?

Let’s say your business earns $100,000 in qualified business income. With the QBI deduction, you may be able to deduct $20,000. If you’re in the 24% tax bracket, that’s a tax savings of nearly $4,800.

For many business owners, this deduction can be the difference between hiring a new employee, investing in marketing, or simply boosting your take-home pay.

Why It Matters for Small Businesses

Large corporations often benefit from specialized tax structures and teams of accountants. The QBI deduction helps level the playing field, giving small businesses a powerful way to reduce their taxable income.

👉 Confused about whether your business qualifies? Contact EinsteinHR today. Our PEO partners help manage payroll and HR compliance so you don’t miss out on deductions.

How the QBI Deduction Works

The deduction sounds simple, but the details can get complicated quickly—especially if your income is above certain thresholds.

Step 1: Calculate Qualified Business Income (QBI)

QBI includes the net profit from your business operations. It excludes:

  • Capital gains or losses

  • Dividends

  • Interest not related to business activities

  • W-2 wages you earn as an employee

Step 2: Apply the 20% Deduction

If your taxable income is below the IRS threshold, you can usually take the full 20% deduction without additional limits.

  • For 2024 tax year:

    • Single filers: $191,950

    • Joint filers: $383,900

Step 3: Income Above the Threshold

If your taxable income is above these limits, things get more complex. Your deduction may be limited based on:

  • The amount of W-2 wages your business pays.

  • The value of qualified property your business owns.

  • Whether your business is a Specified Service Trade or Business (SSTB).

Step 4: W-2 Wage and Property Tests

If you’re above the threshold, your deduction is limited to the lesser of:

  • 20% of your QBI, or

  • The greater of:

    • 50% of your W-2 wages, or

    • 25% of your W-2 wages + 2.5% of qualified property.

Example of Limitations

Imagine your business earns $300,000 in QBI and pays $50,000 in W-2 wages. If your income exceeds the threshold, your deduction may be capped by the wage rule. Without sufficient wages or property, you could lose part—or all—of your deduction.

👉 This is why payroll matters. EinsteinHR helps ensure your payroll is structured correctly so you can claim the maximum deduction.

What Counts as Qualified Business Income?

Not every dollar you earn qualifies for the QBI deduction. Knowing the difference is essential.

Income That Qualifies

  • Net profit from your business operations

  • Rental real estate income (if structured properly)

  • Certain royalties and licensing fees

Income That Does NOT Qualify

  • Capital gains or losses

  • Dividends

  • Interest not related to business activity

  • W-2 wages earned as an employee

Specified Service Trades or Businesses (SSTBs)

Certain industries face additional restrictions if their income exceeds the threshold:

  • Law

  • Accounting

  • Consulting

  • Financial services

  • Healthcare

If your business is considered an SSTB and your taxable income exceeds the phase-out range, your deduction could be reduced—or eliminated.

👉 Not sure if your income qualifies? Talk to EinsteinHR today. Our partners help small businesses like yours stay compliant while maximizing tax savings.

QBI Deduction for Different Business Structures

The rules can vary depending on how your business is structured.

Sole Proprietorships

  • Easiest structure.

  • Income passes directly to your personal tax return.

  • Eligible for QBI, but you need to watch income thresholds.

Partnerships

  • Each partner claims their share of QBI on their personal return.

  • Deduction depends on the partnership agreement and reported income.

S Corporations

  • Income passes through to shareholders.

  • Owners must pay themselves a “reasonable salary” as W-2 wages.

  • Payroll reporting is crucial for maximizing QBI.

LLCs

  • Flexible structure.

  • Can be taxed as a sole proprietorship, partnership, or S-corp.

  • QBI eligibility depends on chosen tax treatment.

Real Estate Investors

  • Rental income may qualify if you meet IRS safe harbor rules.

  • Requires detailed record-keeping and active management.

👉 Choosing the right structure and managing payroll correctly can make or break your QBI deduction. EinsteinHR helps businesses structure payroll and HR systems to optimize eligibility.

The Role of Payroll, W-2 Wages, and NetPEO

Here’s the part many business owners overlook: your payroll reporting directly affects your QBI deduction.

  • If your income is above the IRS threshold, your deduction depends on W-2 wages.

  • Misclassified employees, contractor-heavy workforces, or sloppy payroll systems can reduce your deduction.

This is where a PEO comes in. A Professional Employer Organization acts as a co-employer, handling payroll, HR compliance, and employee benefits. By using a PEO:

  • Your payroll is processed correctly.

  • W-2 reporting is accurate.

  • Compliance risks are minimized.

  • Your QBI deduction eligibility is protected.

👉 EinsteinHR helps you choose the best PEO for your business—so you get payroll and HR support that maximizes your tax savings.

Common Mistakes Businesses Make with QBI

Many businesses miss out on the QBI deduction because of avoidable errors:

  1. Misclassifying workers – treating employees as contractors to cut payroll costs.

  2. Poor payroll records – incorrect or late W-2 reporting.

  3. Ignoring phase-out rules – not planning for income thresholds.

  4. Failing to consult experts – assuming QBI applies without checking eligibility.

👉 Avoid these mistakes. EinsteinHR ensures your payroll and HR records align with IRS standards so you don’t lose deductions.

How EinsteinHR Helps Maximize QBI Deduction

EinsteinHR isn’t a PEO—we’re a PEO broker. That means we evaluate your business needs and connect you with the best-fit PEO partner.

Here’s how that helps you with QBI:

  • Ensures accurate payroll reporting to meet IRS wage tests.

  • Provides compliance support to avoid costly mistakes.

  • Helps structure benefits and HR systems in ways that support long-term growth.

  • Gives you access to cost-effective employee benefits that attract top talent.

Think of EinsteinHR as your tax-saving ally. By matching you with the right PEO, we help you stay compliant, reduce administrative burdens, and keep more of your profits.

👉 Schedule your free consultation today with EinsteinHR. Let’s maximize your QBI deduction and simplify your HR operations.

FAQs on the Qualified Business Income Deduction

1. Do I qualify if I have no employees?

Yes, but if your income is above the threshold, lack of W-2 wages may limit your deduction.

2. Can rental income qualify?

Yes, if you meet IRS safe harbor rules for real estate.

3. Can I claim QBI if I use a PEO?

Yes. In fact, using a PEO can improve your payroll compliance, which helps protect your deduction.

4. Is the QBI deduction permanent?

No. As of now, the deduction is set to expire after 2025 unless Congress extends it.

5. Does QBI affect state taxes?

It applies only to federal income taxes, but some states may offer similar deductions.

Secure Your QBI Deduction With EinsteinHR

The Qualified Business Income Deduction is one of the most powerful tax-saving tools available to small business owners. But it’s also one of the most misunderstood.

Getting it right requires:

  • Correct business structure.

  • Accurate payroll and W-2 reporting.

  • Careful planning if your income is above the IRS thresholds.

Too many small businesses miss out simply because they don’t have the right systems in place. That’s where EinsteinHR makes the difference.

By connecting you with the right PEO partner, EinsteinHR ensures your payroll is accurate, your HR systems are compliant, and your QBI deduction is maximized.

👉 Don’t leave thousands of dollars on the table. Schedule a free consultation with EinsteinHR today and see how much you can save.

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