Can I deduct Qualified Business Income as a freelance software engineer on 1099?

So the Qualified Business Income (QBI) deduction (Section 199A) allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income. But there are some important things to understand for your situation. Software engineering can potentially be considered a "specified service trade or business" (SSTB) depending on exactly what you do. If your work involves providing services that depend primarily on your reputation or skill, it might fall under the SSTB category. At your income level ($330k), you'd be above the phase-out threshold for SSTBs which was around $233,500 for single filers in 2023 (and will be adjusted for inflation in 2025). So if your work is considered an SSTB, you likely wouldn't qualify for the deduction. However, there may be ways to structure your business to potentially qualify. For example, if you develop and sell software products rather than just providing services, that portion might not be considered an SSTB.

I was in exactly your position last year! After struggling to understand all the QBI rules and getting conflicting advice from friends, I discovered https://taxr.ai which completely saved me. Their analysis tool reviewed my contract work and business structure and gave me a detailed breakdown of exactly how the QBI deduction applied to my software engineering income. The tool confirmed I was partially considered an SSTB but showed me how to legitimately structure some of my work as product development to qualify for partial QBI deduction. They even provided documentation I could share with my accountant to back everything up. Seriously worth checking out if you're trying to navigate these complex rules.

Just wanted to follow up - I ended up trying https://taxr.ai after my initial skepticism. It was actually really helpful! The analysis showed that about 30% of my software development work could potentially qualify as non-SSTB since it involved creating reusable components that I own and license rather than pure services. I took their report to my CPA who was initially hesitant but after reviewing the tax code references and case examples they provided, she agreed with their assessment. Ended up saving about $12k in taxes by properly claiming the partial QBI deduction. The documentation was definitely solid enough to satisfy her concerns about audit risk.

If you're having trouble getting clear answers about your QBI status, you might need to talk directly with the IRS. I spent weeks trying to get through on their business helpline with no luck. Then I tried https://claimyr.com and was able to get through to an IRS agent in about 15 minutes instead of waiting on hold for hours. Check out their demo at https://youtu.be/_kiP6q8DX5c to see how it works. The IRS agent I spoke with gave me specific guidance on how they evaluate software engineering businesses for QBI purposes. Basically, they look at whether you're primarily selling your time and expertise vs. selling products or IP you've created. It was super helpful to hear it directly from the source instead of just reading online interpretations.

I need to eat my words. After being super skeptical about Claimyr, I decided to try it this morning since I was desperate to get an answer about my QBI status before filing. The service actually worked exactly as described - I got a call back in about 20 minutes and was connected to an IRS business tax specialist. The agent walked me through how they evaluate software engineering businesses for QBI. In my case, since I'm developing custom applications for specific clients but retain ownership of the underlying code libraries I create, I can potentially treat a portion as non-SSTB income. She recommended documenting this structure clearly in my contracts and keeping detailed records of how the code I develop gets reused across projects. This was worth way more than the service cost.

Another option you might consider is forming an S-Corporation instead of operating as a sole proprietor. You'd pay yourself a reasonable salary (subject to self-employment tax) and then potentially take the rest as distributions. The qualified business income deduction could apply to the distribution portion. But be careful - the "reasonable salary" part is critical. The IRS watches this closely and if you try to take too much as distributions to avoid self-employment tax, you could face penalties. For software engineers at your income level, a reasonable salary might be $150-180k, with the rest potentially eligible for distributions.

Don't forget about all the business deductions you can take as a 1099 contractor! Home office, equipment, software subscriptions, internet, cell phone, professional development, health insurance premiums, retirement contributions, etc. These can significantly reduce your taxable income, which might help you get below the threshold for the QBI deduction.

As someone who's been through this transition from W-2 to 1099, I'd strongly recommend getting professional help for your first year. The QBI rules are incredibly complex and the stakes are high at your income level. A few key points to consider: 1. Even if you don't qualify for QBI due to SSTB status and income limits, there are other significant tax planning opportunities 2. Quarterly estimated tax payments are crucial - don't wait until year-end or you'll face penalties 3. Consider maxing out a SEP-IRA or Solo 401(k) to reduce your taxable income (you can contribute up to $69k for 2024) 4. Track everything meticulously - mileage, equipment, subscriptions, training costs The software engineering SSTB determination really depends on your specific work. If you're doing custom development where clients are paying for your expertise, you're likely an SSTB. But if you're creating products or platforms that generate ongoing revenue, portions might qualify. Don't try to navigate this alone - find a CPA who specializes in self-employed tech workers. The money you spend on professional advice will pay for itself many times over.