How partnerships are taxed
A multi-member LLC is taxed as a partnership unless it elects otherwise. The business files Form 1065, due March 15 for calendar-year entities, and gives each owner a Schedule K-1 showing their share of income, deductions and credits. The owners pay the tax on their personal returns, whether or not the cash was distributed.
Things that trip owners up
- Phantom income. You're taxed on your share of profit even if it stays in the business.
- Guaranteed payments. Payments to a partner for services are deductible to the partnership and generally subject to self-employment tax for the partner. Partners aren't employees and generally shouldn't receive W-2s.
- Allocations and capital accounts. The operating agreement controls how profit, losses and distributions are shared, and the tax return has to follow it.
- Basis limits. You can only deduct losses up to your basis in the partnership.
New Jersey and New York
- New Jersey requires a partnership return (NJ-1065) and imposes a per-partner filing fee on partnerships with more than two owners, along with tax obligations for nonresident partners.
- New York requires a partnership return (IT-204), and LLCs with New York-source income pay an annual filing fee based on that income.
- New York City imposes an unincorporated business tax on partnerships doing business in the city.
- Both states offer pass-through entity tax elections (NJ BAIT and NY PTET) that can reduce federal tax for the partners.
Frequently asked questions
Does a multi-member LLC have to file its own tax return?
Yes. Unless it elects corporate treatment, it files Form 1065 and issues K-1s to each member, even if it had no income.
Can I pay myself a salary from my LLC?
Not as a W-2 employee if the LLC is taxed as a partnership. Partners generally receive guaranteed payments or distributions instead.
Why do I owe tax on money I didn't receive?
Partners are taxed on their share of the partnership's profit for the year, whether or not it was distributed.
What happens if the K-1 is late?
You may need to extend your personal return. Partnership returns are due March 15, which leaves time for owners to file by April 15 when everything is on schedule.