Major tax law changes took effect in 2025 with the passing of the One Big Beautiful Bill, especially for your self-employed clients. This includes legislation that made the 20% qualified business income (QBI) deduction permanent, expanded deduction thresholds, and introduced new benefits that directly impact sole proprietors, gig workers, and other pass-through entities. In this article, we’ll break down the key self-employed tax laws, including QBI deduction, treatment of pass-through entities and other deductions you should consider when working with self-employed clients.
Qualified Business Income
The 2025 tax year brings several law changes across multiple areas of the tax code, including updates introduced as part of the One Big Beautiful Bill (OBBB). Under the OBBB, the Qualified Business Income Deduction is a permanent part of the tax code. OBBB tax law changes include an increase in the income threshold for clients claiming this deduction. Now, married filing joint filers will phase into the deduction at $150,000 and all other filers at $75,000.
For the purposes of the pass-through deduction, qualified income is defined as total business income minus:
- Capital gains or losses
- Dividends or interest
- Annuity payments
- Foreign currency gains or losses
- Reasonable compensation for owner/employees of S-Corps
- Guaranteed payments to partnerships and LLCs
- Deductible portion of the self-employment tax
- Self-employed deductions for retirement plans and health insurance
Pass-Through Entities
Sole Proprietorships, LLCs, S-Corps, and partnerships are known as pass-through entities because income is essentially “passing through” the business to the owner, who claims it on their personal tax return. The business income is then taxed at the owner’s individual income tax rate.
Specified Service Businesses
Specified service businesses are entities that rely on the specific skills of the business owner or employee to make a profit. Examples of specified service business include:
- Healthcare providers (doctors, dentists, etc.)
- Lawyers
- Accountants
- Actuaries
- Financial service providers
- Performing artists
- Consultants
- Athletes
Note: Engineers and architects are not considered specified service business for the purposes of the pass-through deduction.
20% pass-through deduction thresholds
For tax year 2025, the income threshold for claiming the full 20% is $197,300 for single filers or $394,600 for joint filers. If your client’s business earns more than the threshold, the deduction becomes 20% of business income or 50% of total wages paid to employees – whichever is less.
The pass-through deduction and rideshare drivers
Rideshare drivers are typically sole proprietors, so if your client drives for Uber or Lyft, they would be considered a pass-through entity and can qualify for the 20% pass-through deduction. This deduction, which was previously set to expire, is now a permanent part of the tax code for eligible self-employed individuals and small business owners.
Home office deduction in addition to SALT
A home office deduction would be considered a business deduction and would not be included as part of the personal deduction for state and local property tax. If your client meets the qualifications for the home office deduction, they may take that deduction in addition to the $40,000 deduction for state and local taxes (SALT).
Note: The SALT deduction cap has been temporarily increased to $40,000 starting in 2025. This higher cap is scheduled to revert back to the original $10,000 limit in 2030.
Qualified tip income deduction
The recent provisions of the OBBBA introduce an important deduction for self-employed workers in tipped industries. Self-employed clients may qualify to deduct up to $25,000 of their qualified tip income. However, it is essential to remember that this deduction begins to phase out for taxpayers with a modified adjusted gross income of $150,000, or $300,000 for joint filers. To assist tax preparers, the IRS will publish a list of eligible occupations by October 2, 2025. Keep in mind, this deduction is a temporary provision, set to expire in 2028.
Auto loan interest deduction
Clients can deduct up to $10,000 in interest on loans for qualified vehicles. A qualifying vehicle for the interest deduction generally includes passenger vehicles weighing up to 6,000 pounds, as well as trucks and SUVs that meet specific criteria. Vehicles used primarily for business purposes and certain electric or hybrid models may also qualify. This deduction is available for the duration of the current provisions, which extend through 2028.
1099-K reporting changes
The recent OBBB legislation reinstates the previous $20,000 and 200 transaction threshold for 1099-K reporting, a shift that reverses the modifications made by the American Rescue Plan Act of 2021. Additionally, beginning in 2026, the current $600 reporting threshold will increase to $2,000. This new threshold will then be adjusted for inflation starting in 2027.
