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Based on the IRS website, partnerships and LLCs being taxed as partnerships appear to only file (at the federal level) 1065 forms with schedule K-1 forms (for each partner/member).

If I'm reading things correctly, that means businesses taxed as partnerships are only responsible for the self-employment taxes for each of their partners/members (i.e. their respective FICA contributions). This, in turn, should mean that a partnership's total, federal tax on earnings is 15.3% (as of 2018) so long as each partner makes below $118,500. This seems a little low compared to the alternatives. Are there really no other taxes or fees I'm forgetting about.

To be clear, this question is only about federal taxation.

CircleSquared
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1 Answers1

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This really isn't about law, but I'll answer anyway as I've had an LLC for years...

LLC's (other than those taxed as C-Corps) are taxed as pass-through entities. That means that the income is "passed through" to the members based on the ownership share. Each member is then responsible for paying the appropriate taxes. The business itself is not taxed, nor is it responsible for paying the taxes of its members.

So yes, they (the members) pay normal income tax, self-employment tax, and any local taxes.

Lets take an example, Example LLC has 2 members Jack and John. Jack is a 75% ownership and John is 25% ownership. During the year the LLC takes in $250,000 in profits. The LLC files schedule K-1 with the IRS attributing $187,500 to Jack and $62,500 to John.

Jack pays taxes on $187,500 of income

  • AGI is $177,028
  • Standard deduction is $12,000
  • Taxable Income is $165,028
  • Tax before SET is $34,499
  • Self Employment Tax is $20,943
  • Total Tax bill: $55,442 (32% Tax Bracket)

John pays taxes on $62,500 of income

  • AGI is $58,085
  • Standard deduction is $12,000
  • Taxable Income is $46,085
  • Tax before SET is $6,078
  • Self Employment Tax is $8,831
  • Total Tax Bill: $14,909 (22%)

This scenario doesn't include local/state taxes that may also be levied, as well as any interest/charges if quarterly payments were not made.

So yes, an LLC with more than one member only needs to file form K-1 identifying with the IRS what portion of the businesses income is attributed to each member. This is not an obligation to pay any taxes on the part of the business, it is simply telling the IRS to "expect this much from X member". The IRS then uses K-1 to cross-check the members income tax forms that they file to be sure that they are paying appropriate taxes. If they don't match the member will get a bill (funny though I've never encountered the IRS voluntarily sending refunds if it differs in the members favor).

Ron Beyer
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