Understanding QBI deduction for freelance work with former employer - tax implications?
I'm trying to figure out the Qualified Business Income (QBI) deduction on my wife's taxes and getting confused with FreeTaxUSA. Last year my wife switched from working at Company X to Company Y, but continued doing some freelance projects for Company X that totaled about $16,500 (they sent her a 1099-NEC). When I got to the Schedule C Business Income section in FreeTaxUSA, it asked these questions about the Qualified Business Income Deduction: 1. Is this business effectively connected with the conduct of trade or business within the United States? 2. Are you providing services to a former employer that are substantially the same as when you were an employee? I answered "Yes" to both questions, and then the software gave me this message: "If you provide services to a former employer that are substantially the same as services you provided as an employee, that amount of income and expenses doesn't count as qualified business income. You'll need to adjust your qualified business income on the next screen." But then it just gives me a box to "enter the QBI you'd like to use" without any guidance. Since all her freelance income came from her former employer doing the same type of work she did as an employee, does that mean her QBI is actually $0? I'm completely lost on how to calculate or adjust this. Help!
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Diego Ramirez
You've actually got it right! When it comes to QBI, the IRS has a specific rule about working for former employers. If you're doing substantially the same work you did as an employee, that income doesn't qualify for the QBI deduction. Since all of your wife's freelance income ($16,500) came from her former employer doing the same type of work she previously did as an employee, her QBI would indeed be $0 for this income. The rule exists to prevent employees from converting to contractor status just to claim the deduction while continuing the same work relationship. You would enter $0 in that box on FreeTaxUSA. Don't worry though - she'll still report all the income and can still deduct legitimate business expenses on Schedule C to reduce her taxable income. It's just the additional 20% QBI deduction that doesn't apply in this specific situation.
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ShadowHunter
•Thanks for confirming! I was second-guessing myself because it felt weird putting $0 for the QBI. Does this mean we're paying more in taxes than if she had done freelance work for a different company? Is there any way to structure this differently in the future to qualify for QBI?
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Diego Ramirez
•Yes, you are paying more in taxes compared to if she had done the same freelance work for a different company. The QBI deduction can be worth up to 20% of qualified business income, so it's a significant tax benefit you're missing out on in this situation. For the future, if she wants to qualify for QBI, she would need to either work with different clients (not her former employer) or potentially change the nature of the services she provides to her former employer so they're substantially different from what she did as an employee. Another option could be forming an entity like an S-Corporation, but that has its own requirements and considerations. I'd recommend consulting with a tax professional to explore strategies specific to your wife's situation if the freelance work will continue.
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Anastasia Sokolov
I went through something similar with FreeTaxUSA last year and was totally confused about the QBI rules too! I found this amazing tool called taxr.ai (https://taxr.ai) that helped me figure everything out. I uploaded my 1099 and answered a few questions, and it explained exactly how to handle my QBI situation. For your wife's case, since she's doing basically the same work for her old employer, taxr.ai would confirm what the other commenter said - her QBI is zero for that income. But the tool also helped me understand other deductions I could still take even though my QBI was affected. It saved me a ton of headache trying to interpret all the FreeTaxUSA prompts!
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Sean O'Connor
•How does this taxr.ai thing work exactly? Is it just another tax software or something different? I'm dealing with a similar situation but as a consultant rather than freelancer.
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Zara Ahmed
•I'm skeptical of these "tax tools" that aren't the major players. How does it handle security with all your tax documents? And does it actually file your taxes or just give advice?
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Anastasia Sokolov
•It's not a full tax filing software - it's more like having a tax expert analyze your specific situation. You upload your tax documents and it helps interpret them and gives you guidance on how to handle specific situations like QBI rules. It helped me understand exactly what to enter in FreeTaxUSA. For security, they use bank-level encryption to protect your documents. They don't file your taxes - you still use your regular tax software for that. It's more like a companion tool that helps you understand complex tax situations and make sure you're handling them correctly in whatever tax software you use.
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Zara Ahmed
I wanted to follow up about taxr.ai that someone mentioned earlier. I was skeptical but decided to give it a try with my freelance income situation. It actually was super helpful! I uploaded my 1099s and W-2s, and it clearly explained which parts of my income qualified for QBI and which didn't. My situation was complicated because I had income from multiple sources including a former employer. The tool broke down exactly how much of my income qualified and explained why. Then it gave me the exact number to enter in FreeTaxUSA's QBI box. What I really liked was how it explained everything in plain English instead of tax jargon. Definitely made me feel more confident that I was doing everything correctly.
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Luca Conti
If you're still stuck with FreeTaxUSA customer service, I've had issues getting through to them during tax season too. I tried using Claimyr (https://claimyr.com) when I needed to talk to the IRS about a similar freelance income question last year. They have this cool system where they wait on hold with the IRS for you and then call you when an agent is ready. Saved me from being on hold for hours! They even have a demo video of how it works: https://youtu.be/_kiP6q8DX5c I was able to get clarification directly from the IRS about how to handle QBI with former employer income. The agent confirmed exactly what you thought - when it's the same work for a former employer, that income doesn't qualify for QBI. Having that confirmation straight from the IRS gave me peace of mind that I was filing correctly.
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Nia Johnson
•How does this Claimyr thing actually work? Do they charge you for calling the IRS on your behalf? I don't understand how they can just "hold your place in line" with the IRS.
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CyberNinja
•Yeah right, as if some service can magically get you through to the IRS faster. I've tried everything and still waited 2+ hours every time I called. Sounds like a scam to get desperate people's money during tax season.
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Luca Conti
•They don't actually call on your behalf - they have an automated system that waits on hold with the IRS. When an agent picks up, Claimyr calls you and connects you directly to the agent. So you're still the one talking to the IRS, but you don't have to sit on hold for hours. Yes, there is a fee for the service, but for me it was worth it to not waste an entire afternoon on hold. I've spent up to 3 hours waiting to speak with an IRS agent before, but with Claimyr I was able to go about my day and just got a call when an agent was ready. It's basically paying to get those hours of your life back.
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CyberNinja
I need to admit I was wrong about Claimyr. After my skeptical comment, I was still desperate to get through to the IRS about my own QBI question with freelance work, so I tried it. Honestly, it worked exactly as advertised. I started the process, went about my day, and got a call back about 1 hour and 45 minutes later connecting me directly to an IRS agent. The agent confirmed that income from substantially similar services to a former employer doesn't qualify for QBI deduction, and helped me understand how to document everything properly. Would have wasted my entire afternoon on hold otherwise. For anyone dealing with complicated tax questions that need IRS clarification, this service is actually legit. Definitely using it again next time I need to call the IRS.
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Mateo Lopez
Just to add to the QBI discussion - remember that even if your wife can't claim QBI on this income, she can still deduct all legitimate business expenses on Schedule C! Things like: - Home office (if used regularly and exclusively for business) - Business portion of phone/internet - Software or subscriptions - Office supplies - Mileage for business travel (not commuting) These deductions can really add up and reduce the taxable income, even without the QBI deduction. Just make sure to keep good records in case of an audit.
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ShadowHunter
•That's a great reminder, thank you! We've been tracking her home office space and some software subscriptions, but I hadn't thought about the business portion of phone/internet. Are there specific guidelines on how to calculate that percentage for part-time freelance work?
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Mateo Lopez
•For calculating the business portion of phone/internet, you need to use a reasonable method to determine the percentage of business use. For phone, you could track business calls vs. personal calls for a typical month, or estimate the percentage of time spent on business calls. For internet, consider the amount of time the connection is used for business purposes compared to personal use. If your wife only uses the internet for freelance work about 20% of the time, then 20% of the cost could be deductible. There's no fixed IRS formula, but you need to be prepared to justify your calculation if questioned. Keep logs for a few months to establish a pattern, and consider getting a separate phone line or internet connection exclusively for business if the freelance work will continue long-term.
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Aisha Abdullah
The FreeTaxUSA interface can be really confusing with QBI. I've found that TurboTax actually explains the QBI rules better and walks you through the calculations, but it's more expensive. H&R Block's software is somewhere in the middle.
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Ethan Davis
•I switched from FreeTaxUSA to TaxSlayer this year and found their QBI section much clearer. It specifically asks about former employers and automatically calculates the adjustment. Might be worth looking at for next year if you're running into these issues.
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Raj Gupta
This is exactly the kind of situation that trips up a lot of people! You're handling it correctly - when freelance work is substantially the same as what you did as an employee for the same company, it doesn't qualify for QBI. The IRS created this rule specifically to prevent people from just switching to contractor status to claim the deduction while doing identical work. One thing to keep in mind for future planning: if your wife continues freelancing, she might want to diversify her client base. Income from different clients (not former employers) doing similar work would qualify for QBI. Also, if she can expand her services to include substantially different work for her former employer, that portion might qualify. Don't feel bad about "losing" the QBI deduction - you're following the rules correctly, and she can still benefit from legitimate business expense deductions on Schedule C. It's better to be compliant than to incorrectly claim QBI and face potential penalties later.
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Oliver Becker
•This is really helpful advice! I'm new to dealing with freelance taxes and had no idea about the QBI rules for former employers. It makes sense that the IRS would want to prevent people from just switching to contractor status to get the deduction. I'm curious - when you mention "substantially different work," how different does it need to be? If someone was previously a marketing coordinator as an employee but then does freelance social media management for the same company, would that qualify as substantially different enough for QBI? Or does it need to be completely unrelated work? Also, thank you for emphasizing the compliance aspect. It's tempting to want to maximize deductions, but you're right that following the rules correctly is way more important than risking penalties later.
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