IRS Schedule 1-A for Freelancers: Which OBBBA Deductions Actually Apply to Schedule C Income (2026)

Published: August 31, 2026 · Reading time: 11 min

TL;DR: Schedule 1-A is the new form for four deductions the 2025 One Big Beautiful Bill Act created: tips (§224), overtime (§225), car loan interest (§163(h)(4)), and a $6,000 senior bonus. Of the four, only the tips deduction and the senior deduction reach a typical Schedule C filer directly; the overtime deduction never applies to self-employment income at all (FLSA doesn't cover independent contractors); and the car loan interest deduction only helps if your vehicle is expected to be used more than half the time for personal driving. All four are below-the-line deductions — they cut taxable income, not AGI — so none of them help any other AGI-sensitive break on your return, and Schedule C profit still counts toward the MAGI phase-out on each one even when the deduction itself doesn't apply to that income.

Four new deductions, one new form, and a lot of headline coverage that treats them as interchangeable. They aren't. For a Schedule C filer, the practical question isn't "how much can I deduct" — it's "which of these four even apply to me," and the answer is different for each one. This guide walks through Schedule 1-A itself, then each of the four deductions from a self-employment angle, with a worked example showing how a profitable side business can shrink a deduction it can never benefit from.

What Schedule 1-A Actually Is

Schedule 1-A (Form 1040), Additional Deductions, is new starting with the 2025 tax year. It has six parts:

Part I — compute your modified adjusted gross income (MAGI), the figure every phase-out below is tested against
Part II — qualified tips (§224)
Part III — qualified overtime compensation (§225)
Part IV — qualified passenger vehicle loan interest (§163(h)(4)), including the vehicle's VIN
Part V — the enhanced deduction for taxpayers 65 and older
Part VI — adds up Parts II, III, IV, and V into a single total, which is the figure that actually moves to Form 1040

You complete only the parts that apply to you, then carry the Part VI total to Form 1040. All four deductions are available whether or not you itemize, and all four are scheduled to expire after the 2028 tax year unless Congress extends them.

The Detail Almost Every Headline Gets Wrong

Most coverage calls these "above-the-line" deductions, the same shorthand used for the IRA deduction or the health savings account deduction. They aren't. Structurally, all four sit in the computation of taxable income under IRC §63 — the same slot the QBI deduction occupies — and the Schedule 1-A total lands on Form 1040 Line 13b, which comes after AGI is already finalized on Line 11.

That ordering has one consequence worth internalizing before anything else in this guide: none of these four deductions reduce your AGI, which means none of them help any other AGI- or MAGI-tested item on your return — not the IRA deduction phase-out, not education credits, not the premium tax credit, and, most relevant to the worked example below, not even each other's MAGI test. The MAGI figure used to phase out your overtime deduction is calculated before the overtime deduction (or the tips, car loan, or senior deduction) is subtracted from anything. You can't reduce your way into a bigger deduction by claiming one first.

Which of the Four Reach Schedule C Income

Deduction	Cap	2026 MAGI phase-out threshold	How the phase-out is computed	Applies to self-employment income?
Tips (§224)	$25,000	$150,000 single / $300,000 MFJ	Schedule 1-A rounds down: divide excess MAGI by $1,000, drop any fraction, multiply by $100	Yes — for ~70 listed tipped occupations, but capped at Schedule C net profit under §224(c). See our tips deduction guide.
Overtime (§225)	$12,500 single / $25,000 MFJ	$150,000 single / $300,000 MFJ	Same rounded-down mechanic as tips: $100 per full $1,000 of excess MAGI	Schedule C profit: no. FLSA doesn't cover independent contractors, so business profit never generates qualifying overtime. (1099-reported overtime pay for a genuine FLSA employee is a separate case — see the FAQ below.)
Car loan interest (§163(h)(4))	$10,000	$100,000 single / $200,000 MFJ	Rounds up: divide excess MAGI by $1,000, round up to the next whole number, multiply by $200 — effectively eliminated once MAGI exceeds roughly $149,000 single / $249,000 MFJ	Conditionally — only if the vehicle is expected to be used more than half the time for personal driving. See our car loan interest deduction guide.
Senior (65+)	$6,000 ($12,000 both spouses 65+)	$75,000 single / $150,000 MFJ	A true linear 6% of excess MAGI — no rounding step, unlike the other three	Yes — age-based, not income-type-based. See our senior deduction guide.

Two of the four — tips and the senior deduction — are genuinely available to a Schedule C filer, subject to their own caps. Schedule C net profit itself is a dead end for the overtime deduction, because of how FLSA coverage is defined, not because of any Schedule C-specific limitation. Car loan interest depends entirely on how you actually use the vehicle. And notice the phase-out mechanics aren't even consistent with each other: three of the four deductions use a stepped, rounded formula rather than a smooth percentage, and two of those three round in opposite directions.

Worked Example: A Side-Gig Freelancer's Overtime Deduction, Shrunk by Income It Never Touches

Priya works full-time as a W-2 project coordinator and freelances as a graphic designer on the side, reporting the freelance income on Schedule C.

2026 W-2 wages: $112,000, including $6,000 of qualifying FLSA overtime premium pay
2026 Schedule C net profit (freelance design): $50,000
Single filer, no other adjustments

Step 1 — self-employment tax and the half-SE-tax deduction:

Net SE earnings: $50,000 × 92.35% = $46,175.00
SE tax: $46,175.00 × 15.3% = $7,064.78
Half-SE-tax deduction (above-the-line, on Schedule 1): $3,532.39

Step 2 — AGI and MAGI:

AGI = $112,000 + $50,000 − $3,532.39 = $158,467.61
MAGI for the overtime deduction (no addbacks apply here) = $158,468 (rounded)

Step 3 — the overtime deduction phase-out:

Schedule 1-A doesn't apply a smooth percentage here — it rounds. Divide excess MAGI by $1,000, drop any fraction (never round up), then multiply by $100:

Threshold (single): $150,000
Excess MAGI: $158,468 − $150,000 = $8,468
$8,468 ÷ $1,000 = 8.468 → rounded down to 8
Reduction: 8 × $100 = $800
Overtime deduction allowed: $6,000 − $800 = $5,200

Had Priya not freelanced at all, her MAGI would have been $112,000 — comfortably under the $150,000 threshold — and she'd have deducted the full $6,000 with no phase-out. Her Schedule C profit, which gets zero overtime-deduction benefit of its own (it isn't FLSA overtime), still cost her $800 of the deduction she earned at her W-2 job, purely by raising her MAGI. That's the practical bite of "MAGI includes everything" for a side-gig freelancer: the deduction you can't use and the deduction you can use are tested against the same combined number. (Note the rounding also means the reduction moves in $100 jumps rather than smoothly — Priya could earn up to $532 more in Schedule C profit before her excess MAGI crosses into the next $1,000 step and the reduction rises again; conversely, about $468 less profit would drop her excess MAGI below $8,000, into the prior step, and increase her overtime deduction.)

Frequently Asked Questions

What is IRS Schedule 1-A?

Schedule 1-A (Form 1040), Additional Deductions, is a brand-new form for the 2025 tax year (the return most people file in early 2026). It consolidates four deductions created by the 2025 One Big Beautiful Bill Act (OBBBA): qualified tips (IRC §224), qualified overtime compensation (IRC §225), qualified passenger vehicle loan interest (IRC §163(h)(4)), and the enhanced deduction for taxpayers 65 and older (OBBBA §70103). You compute your modified adjusted gross income (MAGI) in Part I, then complete only the parts for deductions you're claiming, and carry the total to Form 1040.

Are the Schedule 1-A deductions above-the-line or below-the-line?

Below-the-line, despite how most headlines describe them. All four flow to Form 1040 Line 13b, which sits below the AGI line (Line 11) — they reduce your taxable income, not your AGI. That single distinction matters because it means claiming them does nothing to help any AGI- or MAGI-sensitive phase-out elsewhere on your return, including the MAGI test used to determine your own eligibility for these same four deductions, which is computed before they're subtracted, not after.

Can a Schedule C freelancer use the tips deduction?

Yes — it's the one Schedule 1-A deduction Congress explicitly extended to the self-employed. If your occupation is on Treasury's list of roughly 70 occupations that customarily and regularly received tips before 2025, you can deduct qualified cash tips up to $25,000. It comes with a business-specific catch: §224(c) caps the deduction at your Schedule C net profit, not at the tips you actually received. See our dedicated guide on the tips deduction for the full mechanics.

Can a Schedule C freelancer use the overtime deduction?

Schedule C net profit itself never qualifies — IRC §225 only reaches overtime compensation required under section 7 of the Fair Labor Standards Act, and business profit isn't wage compensation of any kind. The gate is FLSA-employee status, not the form the pay was reported on: Schedule 1-A even has a line for qualified overtime reported on a 1099 rather than a W-2, for a worker who is legally an FLSA employee but was paid on a 1099. For a genuine independent contractor with no FLSA overtime entitlement, none of that applies, and the deduction mainly matters to a freelancer who also holds a real W-2 job with FLSA overtime.

Does Schedule C net profit count toward the MAGI phase-outs for these deductions?

Yes, for all four. MAGI for Schedule 1-A purposes is based on your total adjusted gross income, which includes Schedule C net profit (after the deduction for half of self-employment tax) alongside any W-2 wages and every other income source on your return. A profitable freelance side business can push MAGI over a phase-out threshold even for a deduction the freelance income itself could never qualify for.

Authoritative References

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This guide is general education for U.S. freelancers and independent contractors filing for the 2026 tax year. It is not personalized tax advice. Whether a specific deduction applies to your return depends on facts a CPA or EA should review before you file.

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