Maximizing QBI Deduction for S-Corps: 2026 Strategies

The 20% Qualified Business Income deduction is one of the most valuable tax breaks available to S-Corp owners. And as of July 2025, it’s permanent.

But here’s what most owners don’t realize: for S-Corporations, the salary you pay yourself directly affects your QBI deduction. Pay too little, and high earners can lose the deduction entirely. Pay too much, and you’re giving up FICA savings.

This guide explains how to optimize your S-Corp salary specifically for QBI, including the 2026 thresholds, wage limitations, and strategies for service businesses.

Key Takeaways

• Higher S-Corp salary means lower QBI—but it also increases your W-2 wage limitation above threshold
• Below the threshold ($203K single / $406K MFJ), minimize salary to save FICA with no QBI penalty
• Above the threshold, optimize salary so wage limitation captures your full QBI deduction
• SSTB owners face complete phase-out above $278K/$556K—staying below thresholds is critical
• Retirement contributions reduce taxable income, potentially keeping you below threshold limits

QBI Deduction Basics for S-Corp Owners

The Qualified Business Income deduction under Section 199A allows eligible taxpayers to deduct up to 20% of their qualified business income from pass-through entities, including S-Corporations.

What counts as QBI for S-Corp owners?

Your QBI is the income reported on your Schedule K-1 from the S-Corp. It does not include your W-2 wages from the S-Corp.

This is critical: Higher salary = Lower QBI.

If your S-Corp earns $200,000 and you pay yourself $80,000 in salary, your QBI is $120,000 (the remaining K-1 income). Your potential deduction is 20% × $120,000 = $24,000.

What Changed in 2026

The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, made the QBI deduction permanent. Previously, it was set to expire after December 31, 2025.

Additionally, starting in 2026, there’s a new $400 minimum QBI deduction for qualifying businesses with at least $1,000 of active income. Even if limitations would otherwise reduce your deduction to zero, you’ll receive at least $400.

For the complete overview, see our Qualified Business Income Deduction Guide.

2026 QBI Income Thresholds

The QBI deduction is straightforward when your taxable income is below certain thresholds. Above those thresholds, limitations apply.

2026 Thresholds (Inflation-Adjusted)

Below the threshold: You get the full 20% deduction on your QBI, regardless of W-2 wages or property.

Above the threshold: Your deduction may be limited by the W-2 wage limitation or the SSTB rules (for service businesses).

In the phase-out range: Limitations are phased in gradually. The 2026 phase-out range is $75,000 for single filers and $150,000 for married filing jointly, which is wider than prior years.

The W-2 Wage Limitation Explained

This is where S-Corp salary optimization gets interesting.

Once your taxable income exceeds the threshold, your QBI deduction is limited to the greater of:

1. 50% of W-2 wages paid by the business, OR
2. 25% of W-2 wages + 2.5% of UBIA (unadjusted basis of qualified property)

For most S-Corps without significant depreciable assets, the 50% of W-2 wages formula applies.

Why This Matters for S-Corps

Your W-2 salary to yourself counts as W-2 wages for this limitation. Pay yourself a higher salary, and you increase your wage limitation. Pay yourself nothing, and your QBI deduction could be zero, regardless of how much QBI you have.

Example: The Zero-Salary Problem

In Scenario A, despite having $300,000 in business income, the owner gets zero QBI deduction because there are no W-2 wages to satisfy the limitation.

In Scenario B, paying $100,000 in salary reduces QBI to $200,000 but creates enough wage limitation to capture the full $40,000 deduction.

Use our QBI Calculator to model your specific situation.

S-Corp Salary Optimization for QBI

The challenge: Every dollar of salary reduces your QBI (and costs you FICA taxes), but it also increases your wage limitation.

The Optimization Formula

For taxpayers above the QBI threshold, the optimal salary often results in a wage limitation that just exceeds your tentative QBI deduction. Here’s the rough math:

If your tentative deduction (20% × QBI) equals your wage limit (50% × W-2):

• 20% × QBI = 50% × W-2
• QBI = 2.5 × W-2

This means for every $2.50 of QBI, you need $1 of W-2 wages to fully capture the deduction.

Salary Optimization by Income Level

When FICA Savings Win

If you’re below the QBI threshold, you don’t need to worry about the wage limitation. In that case, lower salary (while still reasonable) saves FICA with no QBI penalty.

When QBI Optimization Wins

If you’re above the threshold and your tentative deduction would be reduced by the wage limitation, paying more salary can actually lower your total tax, even after accounting for additional FICA.

This calculation gets complex. Work with your CPA to model the actual numbers.

For guidance on setting appropriate salary levels, see S-Corp Reasonable Compensation Guide.

SSTB Rules and Phase-Outs

Specified Service Trades or Businesses (SSTBs) face additional limitations on the QBI deduction.

What Qualifies as an SSTB?

• Health (doctors, dentists, nurses, etc.)
• Law
• Accounting
• Actuarial science
• Performing arts
• Consulting
• Athletics
• Financial services
• Brokerage services
• Reputation or skill-based businesses

SSTB Phase-Out Rules (2026)

Below the threshold: SSTB status doesn’t matter. You get the full QBI deduction.

In the phase-out range: A decreasing percentage of SSTB income qualifies for QBI deduction.

Above the threshold: SSTB income receives no QBI deduction, regardless of W-2 wages.

Strategies for SSTB Owners

1. Stay below the threshold through retirement contributions, HSA contributions, or timing deductions
2. Separate non-SSTB activities into a different entity (e.g., administrative services, product sales)
3. Maximize deductions that reduce taxable income without affecting QBI

Using Qualified Property (UBIA)

The alternative limitation formula includes the unadjusted basis of qualified property (UBIA):

25% of W-2 wages + 2.5% of UBIA

What Is UBIA?

UBIA is the original cost (unadjusted basis) of depreciable property held at year-end that hasn’t yet reached the end of its depreciable period.

Who Benefits?

• Capital-intensive businesses (manufacturing, equipment-heavy operations)
• Real estate (for some QBI purposes)
• Businesses with significant recent equipment purchases

Example:

$100,000 W-2 wages + $500,000 UBIA

• 50% of W-2 wages = $50,000
• 25% of W-2 + 2.5% of UBIA = $25,000 + $12,500 = $37,500

The 50% formula wins here, so the equipment doesn’t help. But for businesses with lower wages and higher property, the UBIA formula can increase the limitation.

For equipment deduction strategies, see our Section 179 Deduction Guide.

Retirement Contributions and QBI

Retirement contributions offer a strategic way to manage your position relative to QBI thresholds.

How It Works

Contributions to qualified retirement plans (401(k), SEP-IRA) reduce your taxable income. If your taxable income would otherwise push you into the QBI phase-out range, retirement contributions could keep you below the threshold.

2026 Contribution Limits

Example:

Taxable income of $220,000 (single) puts you in the QBI phase-out. Maximum 401(k) deferral of $24,500 drops taxable income to $195,500, keeping you below the $203,000 threshold.

Result: Full 20% QBI deduction instead of a partially phased deduction.

For retirement planning details, see S-Corp Retirement & 401(k) Guide.

Multi-Year QBI Planning Strategies

QBI optimization isn’t just about this year. Strategic timing across years can maximize deductions.

Income Shifting

If you can control when income is recognized (billing timing, contract structure), you may be able to keep one year below the threshold while accepting a higher income year when other factors are more favorable.

Deduction Timing

Bunching deductions into a single year can drop taxable income below the threshold. Consider timing:

• Equipment purchases (Section 179)
• Retirement contributions
• Charitable contributions (if applicable)
• State tax payments (PTET elections)

Spousal Income Coordination

For married filing jointly, the combined threshold is $406,000. If one spouse has significant non-business income, it affects QBI phase-out calculations. Consider whether filing separately (rarely beneficial) or income timing between spouses could help.

State Tax Planning

Pass-Through Entity Tax (PTET) elections in the 36 states that offer them create entity-level deductions that reduce taxable income, potentially affecting QBI threshold positioning.

Frequently Asked Questions

How do I maximize my QBI deduction as an S-Corp?

For income below the threshold, take the full 20% deduction by ensuring your business generates qualified income. For income above the threshold, optimize your salary to meet the W-2 wage limitation. Use retirement contributions to manage your position relative to thresholds. SSTB owners should focus on staying below thresholds when possible.

Does my S-Corp salary count toward the W-2 limitation?

Yes. Your W-2 salary is the primary source of W-2 wages for single-owner S-Corps. The wage limitation is 50% of total W-2 wages paid by the business. Higher salary to yourself increases your wage limitation.

Is the QBI deduction permanent?

Yes. The One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, made the Section 199A deduction permanent. It was previously scheduled to expire after December 31, 2025.

What is the 2026 QBI income threshold?

The phase-out begins at $203,000 for single filers and $406,000 for married filing jointly. The phase-out range is $75,000 (single) and $150,000 (MFJ).

What if I’m in a specified service business?

SSTBs face complete phase-out of QBI deduction above certain income levels ($278,000 single / $556,000 MFJ for 2026). Below the initial threshold, SSTB status doesn’t affect your deduction. Strategies include managing taxable income to stay below thresholds and separating non-SSTB activities.

Can retirement contributions affect my QBI?

Yes. Retirement contributions reduce taxable income, potentially keeping you below QBI thresholds where the full 20% deduction applies. They don’t reduce your QBI itself (that’s based on K-1 income), but they affect which limitation rules apply to you.

Optimizing Your QBI Strategy

The QBI deduction creates complex optimization opportunities for S-Corp owners. The interplay between salary, FICA taxes, wage limitations, and income thresholds means there’s rarely a simple answer.

What works for a $150,000-income owner won’t work for a $500,000-income SSTB. The calculations change based on property holdings, retirement savings, and filing status.

The good news: the deduction is now permanent. You have time to plan properly rather than scrambling before an expiration date.

If you want help modeling the optimal salary and contribution strategy for your specific situation, schedule a QBI optimization analysis. We specialize in S-Corp tax planning and can help you capture the maximum deduction while minimizing FICA.

Try our QBI Calculator to start exploring how different scenarios affect your deduction.