united-states business tax-law corporate-law partnership
How much are partnerships and LLCs really taxed?
<p>Based on the IRS website, <a href="https://www.irs.gov/businesses/small-businesses-self-employed/partnerships" rel="nofollow noreferrer">partnerships</a> and <a href="https://www.irs.gov/businesses/small-businesses-self-employed/llc-filing-as-a-corporation-or-partnership" rel="nofollow noreferrer">LLCs being taxed as partnerships</a> appear to only file (at the federal level) 1065 forms with schedule K-1 forms (for each partner/member).</p>

<p>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.</p>

<p><em>To be clear, this question is only about federal taxation.</em></p>

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

<p>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. <strong>The business itself is not taxed, nor is it responsible for paying the taxes of its members.</strong></p>

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

<p>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.</p>

<p>Jack pays taxes on $187,500 of income<br/></p>

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

<p>John pays taxes on $62,500 of income<br/></p>

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

<p>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. </p>

<p>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. <strong>This is not an obligation to pay any taxes</strong> 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).</p>
