How a multi-member LLC is taxed

Ana and Ben own a landscaping LLC in Sacramento, 50/50. They never told the IRS how they wanted it taxed, so it got the default, which for a domestic LLC with two or more members is partnership. Pretty much everything below comes out of that.

The LLC files, the members pay

The partnership itself pays no income tax, as Publication 541 puts it. Profit flows through to Ana and Ben and lands on their own 1040s.

But the LLC does file, on Form 1065. Normally it's due March 15 for a calendar year (the rule is the 15th day of the third month), and for the 2025 year the instructions moved it to Monday, March 16, 2026. Need more time? File Form 7004 by the original due date.

Here's the part that stings. Miss it and the IRS charges $255 per partner for every month or part of a month the return is late (2025 returns, capped at 12 months). If Ana and Ben are three months late without a good excuse, that's $1,530, on a return where the LLC itself owes nothing.

Schedule K-1

Each member gets a Schedule K-1 from the LLC with their piece of the income, deductions and credits, and copies it onto their Form 1040 (a K-1 that's missing or wrong can cost the LLC $340 per form under the same instructions).

What trips up new owners is that the K-1 share is taxed even if the cash never leaves the business. They decide to sit on $40,000 over the winter for a second truck? Each of them still pays tax on $20,000 of that in April.

Guaranteed payments

Partners aren't employees, and the IRS partnerships page says they "shouldn't be issued a Form W-2." Ana runs the crews five days a week while Ben mostly put up the money for equipment, so how does she get paid for the hours?

A guaranteed payment. Pub 541 describes it as a payment to a partner fixed without regard to how much the partnership earns. The LLC takes it as a deduction on line 10 of Form 1065, Ana reports it as ordinary income, and since no one withholds anything from it she has to send in estimated payments herself.

Their first good year: $260,000 before Ana's pay. Take out her $60,000 guaranteed payment, halve the $200,000 left over, and Ana ends up taxed on $160,000 while Ben is taxed on $100,000.

Self-employment tax for members

Ana and Ben also owe self-employment tax. The Schedule SE instructions cover guaranteed payments plus a partner's share of certain partnership income, the number in box 14, code A of the K-1. Over $400 of net earnings means filing Schedule SE.

The math: 92.35% of earnings, times 15.3%. In 2026 the 12.4% Social Security slice of that stops at $184,500. If both count as general partners, it works out like this:

Ben may wonder whether he's a limited partner, since those pay SE tax only on guaranteed payments for work they did. Maybe. The 1065 instructions say LLC members may be treated as limited partners for some purposes, but for SE tax it comes down to section 1402(a)(13), and that's a call a preparer should sign off on before he files that way.

Electing S corp status

Ana's $22,607 is usually the moment someone mentions an S corp. For that, the LLC sends in Form 2553. The deadline is 2 months and 15 days into the year you want it to start, and per the Form 2553 instructions an LLC that does this can skip Form 8832.

Then Ana goes on payroll at a reasonable salary. Profit above that comes out as distributions, and those have no payroll tax.

With two owners there's a catch: one class of stock. An S corp generally has just one class only if every share gives the same rights to distributions. For Ana and Ben at 50/50 that means distributions go out 50/50, even in a year Ana did nearly all the work, and her extra effort has to be paid as salary.

The S corp savings calculator does the payroll tax side. For the full yearly cost of each setup, try the structure switch calculator.

State returns

Then there's the state, and every state does this differently. Three of them:

• California. Form 568, the $800 annual tax, and from $250,000 of California income an extra LLC fee that starts at $900.
• New York. Form IT-204, plus a Form IT-204-LL fee anywhere from $25 to $4,500, set by New York source gross income.
• Illinois. Partnerships owe a 1.5% personal property replacement tax on net income.

Being in Sacramento, Ana and Ben owe California $800 a year before they've mowed one lawn. Other states are on the LLC cost by state page.