Partnership LLC Taxes: Everything You Need to Know
Partnership LLC taxes are paid by each owner on his/her share of the profits from the LLC. 3 min read
2. Sole Member LLC Taxes
3. Multi-Member LLC Taxes
4. Self-Employment Tax Requirements
Partnership LLC Taxes
Partnership LLC taxes are paid by each owner on his/her share of the profits from the LLC. An LLC, or Limited Liability Company, is not treated as a distinct tax entity from its owners; instead, the Internal Revenue Service (IRS) treats the LLC as a pass-through tax entity. As such, all profits/losses of the LLC are passed to the owners who report it on their personal income tax returns. Therefore, the LLC doesn’t pay corporate income taxes. Note, however, that some states do in fact charge a yearly tax to LLCs.
Sole Member LLC Taxes
If only one person owns the LLC, the business is treated as a sole proprietorship for tax reasons. The reason for this is because the IRS views the single-member LLC as a disregarded entity. When it comes time to pay taxes, you, as the only owner, will report all your business’s profits, losses, credits, and deductions on your own personal tax return (Form 1040, Schedule C).
Multi-Member LLC Taxes
The IRS views multi-member LLCs (two or more owners) as partnerships. Similar to the sole proprietorship, the partnership LLC doesn’t pay corporate income taxes. The LLC members will each pay a portion of the profits, losses, credits, and deductions on the personal tax return (Form 1040, Schedule E). Note that each LLC member’s share of profits or losses is referred to as a distributive share. This percentage should be identified in the LLC’s Operating Agreement so that all members are aware of how much of the profits they are responsible for.
While the partnership itself doesn’t file corporate income taxes, the business will still need to file an informational return with the IRS (Form 1065). Thereafter, the business will need to fill out Schedule K-1 for each member, which will provide how much each member is required to report; this form is then provided to each member so that they are aware of what they are responsible for.
Self-Employment Tax Requirements
When you operate an LLC, you might also be required to pay self-employment taxes on any compensation you pay yourself as an owner. The rule is that any owner who also works for or helps manage the business must be provided with a reasonable compensation from the LLC. Keep in mind that just because you are an LLC member doesn’t necessarily mean that you have to pay such taxes. For example, if you are simply an owner who invested in the company, but you have no duty managing or overseeing the daily operations of the business, then you won’t need to pay such self-employment taxes.
But, before you worry about whether you have to pay self-employment taxes, remember that the law isn’t very clear on how inactive the LLC member has to be. With that said, the IRS tried to provide some guidance in this area indicating that self-employment taxes would have to be paid if:
- The member is personally liable for the LLC’s debts.
- The member participates in the business for greater than 500 hours in any given year.
- The member has the authority to sign contracts on behalf of the LLC.
If you are, in fact, required to pay self-employment tax, you need not worry about paying Social Security or Medicare tax, as those earning income subject to this tax aren’t required to also pay Social Security or Medicare taxes on such income.
When it comes time to report your self-employment income, you will have to report it on Schedule SE, which will be submitted with your regular tax return. LLC members, along with owners of a sole proprietorship and partnership, pay double the amount of tax simply because the employer matches a regular employees’ self-employment tax contributions. But LLC owners can also deduct 50 percent of their total self-employment taxes from their income, which results in savings for the LLC owners.
The self-employment tax percentages are as follows:
- 15.3 percent of one’s net income that is up to the annual cap
- 2.9 percentof any income earned that is greater than the capped amount
You can visit the IRS website to find out the threshold amounts, as these amounts can change every few years.
If you need help learning about taxes required for your multi-member LLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.