How Multi-Member LLCs Are Taxed: Form 1065, K-1s, and Guaranteed Payments
If your US LLC has two or more owners and has not elected to be taxed as a corporation, the IRS treats it as a partnership. The LLC files its own federal return, but it does not pay federal income tax on its profit. The owners do.
A multi-member LLC files Form 1065 each year to report its income, deductions, and how profit is divided among the members. It then issues each member a Schedule K-1 showing their share, and each member reports that share on their own return and pays the tax on it. Payments a member receives for work done for the LLC are usually guaranteed payments, which are taxed differently from a share of profit.
The LLC files a return but does not pay federal income tax
Under the default classification rules, an LLC with more than one member is a partnership for federal tax purposes. Form 1065 (U.S. Return of Partnership Income) is an information return. It calculates the business's taxable income and allocates it, but the tax liability sits with the members.
This is pass-through taxation. Profit is taxed once, at the member level, and there is no second layer of tax when the LLC distributes cash. A C corporation, by contrast, pays tax on its profit and its shareholders pay again on dividends.
Pass-through treatment applies to federal income tax only. Your state may charge the LLC an annual fee or franchise tax, and some states tax partnerships at the entity level or let them elect to pay state income tax on the members' behalf.
Form 1065 is due a month before personal returns
For a calendar-year LLC, Form 1065 is due on the 15th day of the third month after year end. The return for the 2026 tax year is due March 15, 2027. Filing Form 7004 by that date extends the deadline automatically by six months, to September 15, 2027.
The earlier deadline exists because members need their K-1s to file their own returns, which are due April 15. An extension on Form 1065 does not extend the members' payment deadlines. If the LLC extends, members usually extend their own returns too and estimate their tax payments without the final K-1 figures.
The late-filing penalty is calculated per member, not per return. For returns due in 2026 it was $255 per member for each month or part of a month the return is late, for up to 12 months, and it applies whether or not any tax was owed. A separate penalty applies for each K-1 that is late or incorrect.
Each member is taxed on their share, distributed or not
The K-1 reports each member's distributive share of the LLC's income, deductions, and credits. Members report it on their own returns, generally on Schedule E of Form 1040 for individuals.
You owe tax on your distributive share whether or not the LLC paid it out to you. If the LLC earned $200,000 and kept all of it in the bank to fund growth, each member still owes tax on their share of $200,000. Many LLCs address this with tax distributions, written into the operating agreement, that pay members enough cash to cover the tax on their allocated income.
Allocations follow the operating agreement. Profit does not have to be split by ownership percentage. The operating agreement can allocate income, losses, and specific deductions differently, as long as the allocations have substantial economic effect under the partnership rules. If the agreement is silent, allocations follow each member's interest in the LLC.
Distributions are not the same as income. A cash distribution to a member is generally not taxable on its own. It reduces the member's basis in the LLC. A distribution becomes taxable only when it exceeds that basis.
Basis limits losses. A member can deduct their share of LLC losses only up to their basis, which starts with what they contributed and moves each year with income, losses, distributions, and their share of LLC debt. The at-risk and passive activity rules can limit losses further.
Guaranteed payments are how members get paid for work
Members of an LLC taxed as a partnership are generally not employees of the LLC, so they cannot receive a W-2 salary from it. When a member is paid a fixed amount for services, or for the use of capital, regardless of whether the LLC is profitable, that payment is a guaranteed payment.
Guaranteed payments are treated differently from distributive share.
The LLC deducts them. A guaranteed payment reduces the LLC's ordinary business income before the remaining profit is divided among members.
The member reports them as ordinary income. They appear on the member's K-1 separately from their distributive share and are taxed in the year the LLC deducts them.
Payments for services carry self-employment tax. A guaranteed payment for services is subject to self-employment tax at 15.3%, up to the Social Security wage base, with the Medicare portion uncapped.
They do not count toward the QBI deduction. Guaranteed payments are excluded from qualified business income, so they do not generate the 20% Section 199A deduction that a member's distributive share of business profit may qualify for.
A guaranteed payment is also different from a draw. A draw is an advance against the member's share of profit and is treated as a distribution. A guaranteed payment is fixed by agreement and owed whether or not the LLC makes money.
A worked example shows how the pieces fit
Assume an LLC has two equal members, A and B, and earns $200,000 in 2026 before paying its members anything. The operating agreement pays Member A a guaranteed payment of $60,000 for running day-to-day operations. Member B is an investor and does not work in the business.
The LLC deducts the $60,000, leaving $140,000 of ordinary business income. That is split equally, so each member's distributive share is $70,000.
Member A's K-1 reports $60,000 of guaranteed payments and $70,000 of distributive share, for $130,000 of total income. The $60,000 is subject to self-employment tax, and because A actively works in the business, the $70,000 share generally is too. Member B's K-1 reports $70,000 of distributive share. Both owe income tax on their full amounts even if the LLC distributed only part of the cash.
Self-employment tax on a member's share depends on their role
Whether a member pays self-employment tax on their distributive share, beyond any guaranteed payments, depends on what the member does. The tax code excludes a "limited partner's" share of income from self-employment tax, but it does not say how that exclusion applies to LLC members, who all have limited liability.
The usual position is that members who work in the business or have management authority pay self-employment tax on their distributive share, and members who are passive investors may not. Courts revisited the limited partner exclusion through 2025 and 2026, and the rules for LLC members are not settled. If your LLC has members with different roles, how each member's share is treated is worth deciding deliberately with whoever prepares the return.
Foreign members change the filing, not the classification
A multi-member LLC with one or more foreign members is still a partnership by default. The foreign ownership adds obligations on top of Form 1065.
Withholding on effectively connected income. Under Section 1446, the LLC must withhold and pay US tax on the share of effectively connected income allocable to each foreign member, whether or not it distributes cash. This is reported on Forms 8804 and 8805, and the foreign member files a US return to claim credit for the tax withheld.
International schedules. Schedules K-2 and K-3 report items of international tax relevance and are often required when a member is foreign.
Form 5472 does not apply here. Form 5472 applies to foreign-owned single-member LLCs and certain corporations. A multi-member LLC taxed as a partnership does not file it, and owners who move from one structure to the other often carry the wrong filing over.
An election can move the LLC out of partnership taxation
A multi-member LLC can elect to be taxed as an S corporation by filing Form 2553, or as a C corporation by filing Form 8832. The LLC stays an LLC under state law in both cases.
An S corp election lets members who work in the business take a reasonable W-2 salary, with profit above the salary passing through without self-employment tax. It also brings S corp restrictions. An S corporation can have only one class of stock, which rules out the flexible allocations a partnership allows, and it cannot have nonresident alien owners, which rules it out for LLCs with foreign members.
A C corp election makes the LLC a separate taxpayer at the 21% federal corporate rate. Distributions are then taxed again as dividends. The election usually comes up when the company plans to raise institutional investment or reinvest most of its profit.
Inkle now works with LLCs
Inkle started with Delaware C-Corps and has expanded to LLCs, including multi-member LLCs taxed as partnerships. Our bookkeepers keep the books that Form 1065 is built from, and our tax experts prepare the return, the K-1s for each member, and the extension when you need one. For LLCs with foreign members, Inkle also handles the Section 1446 withholding filings. You get one dedicated bookkeeper, and the same team that knows your numbers prepares the filing.
The bottom line
A multi-member LLC pays no federal income tax itself, but it carries a filing obligation that a single-member LLC does not, and missing it costs money for every member, every month. What each member owes depends on two documents: the K-1, which sets how much income they are taxed on, and the operating agreement, which decides how that income is allocated and how members are paid for work. Members owe tax on their share whether or not the cash left the LLC, so tax distributions belong in the agreement from the start. If members are paid for their work, those payments should be structured as guaranteed payments, with self-employment tax and QBI treatment planned for in advance rather than discovered at filing time.
Frequently asked questions
Does a multi-member LLC pay taxes?
Not federal income tax, by default. It files Form 1065 as an information return, and each member pays tax on their share of the profit on their own return. The LLC may still owe state fees or state entity-level taxes, and it must pay withholding tax on income allocable to any foreign members.
When is Form 1065 due?
For calendar-year LLCs, Form 1065 is due March 15 of the following year. The 2026 return is due March 15, 2027. Filing Form 7004 by then extends the filing deadline to September 15, 2027.
What is the difference between a guaranteed payment and a distribution?
A guaranteed payment is a fixed amount paid to a member for services or capital, owed regardless of profit, deductible by the LLC, and taxable to the member as ordinary income. A distribution is a payout of the member's share of profit or capital. It is generally not taxable on its own and reduces the member's basis.
Do LLC members pay self-employment tax on their K-1 income?
Guaranteed payments for services are subject to self-employment tax. Whether a member's distributive share is also subject to it depends on the member's role. Members who work in or manage the business generally pay it, while passive investors may not, and the rules for LLC members remain unsettled.
Can a member of an LLC be paid a W-2 salary?
Not while the LLC is taxed as a partnership. Members are paid through guaranteed payments or distributions instead. A W-2 salary becomes possible if the LLC elects to be taxed as an S corporation or a C corporation.
What is the penalty for filing Form 1065 late?
The penalty is charged per member, for each month or part of a month the return is late, for up to 12 months. For returns due in 2026 it was $255 per member per month. It applies even if the LLC owed no tax, and separate penalties apply for late or incorrect K-1s.
