How to File Taxes for a Multi-Member LLC: Form 1065 and K-1s

A multi-member limited liability company files its federal taxes in two connected steps: the LLC itself files an informational partnership return on Form 1065 and hands each owner a Schedule K-1, then each member reports the numbers from that K-1 on their own Form 1040. The LLC pays no federal income tax at the entity level. All of the tax lands on the members’ personal returns, in proportion to each member’s share of the business. Here is how to file taxes for a multi-member LLC the way the IRS expects, from confirming your classification through the individual returns that close the loop.

Confirm How the IRS Classifies Your LLC

A domestic LLC with two or more members is treated as a partnership by default. That is automatic — you do not file anything to get partnership treatment, and it is the classification this article assumes.¹

Two elections change the picture. Filing Form 2553 elects S corporation treatment, in which case the LLC files Form 1120-S instead of Form 1065.² Filing Form 8832 can elect C corporation treatment, which shifts the LLC to Form 1120 and adds entity-level income tax.³ If your LLC has made either election, the process below does not apply. Everything that follows assumes the default: partnership classification, Form 1065, K-1s to each member.

File Form 1065, the Partnership Return

Form 1065 is the LLC’s return, but it is informational — it reports the partnership’s results so the IRS can cross-check what each member later reports personally.⁴ The LLC owes no income tax with this filing.

Deadline and Extension

Form 1065 is due March 15 for calendar-year partnerships, or the 15th day of the third month after the tax year ends for fiscal-year filers.⁵ Filing Form 7004 by that date extends the deadline six months to September 15.⁶

The K-1s are due to members on or before the day the partnership return is due, and an extension of Form 1065 extends the K-1 deadline too.⁷ Members cannot file their own 1040s without their K-1, so late partnership filing forces the members’ personal returns onto extension as well.

Late-Filing Penalty

Missing the deadline costs $255 per month (or partial month) for each partner, up to 12 months.⁵ For a four-member LLC that is $1,020 a month, capped at $12,240. The amount adjusts each year for inflation. A timely extension protects you from the penalty as long as you file by the extended date.

Electronic Filing

Partnerships with more than 100 partners must file Form 1065 electronically. Smaller partnerships must also e-file if they file 10 or more returns of any type during the calendar year, counting income tax, employment tax, and information returns together.⁸ Any LLC with employees or a handful of 1099 contractors will clear that 10-return threshold quickly.

Supporting Schedules

Form 1065 carries several schedules besides the K-1s. Schedule K totals every partner’s combined share of income, deductions, and credits. Schedule L (the balance sheet) and Schedules M-1 and M-2 (reconciling book to tax income and tracking capital account changes) are required unless the partnership qualifies for a size-based exemption: total assets under $10 million along with a “Yes” answer to specified questions on Schedule B lets you skip them.⁷

Schedules K-2 and K-3 report international tax information, and most purely domestic LLCs can skip them. The exception applies if the partnership has no foreign activity (or only limited passive foreign income with no more than $300 in foreign taxes paid), all direct partners are U.S. citizens or resident aliens (or domestic entities owned by them), the partnership notifies partners that a K-3 will not be furnished unless requested, and no partner requests it before one month prior to the filing date.⁹

Election Out of the Centralized Audit Regime

Under the Bipartisan Budget Act rules, the IRS audits partnerships at the entity level and can assess adjustments against the partnership itself. An LLC with 100 or fewer partners can elect out annually on Schedule B, but only if every partner is an eligible type: an individual, a C corporation, an S corporation, or an estate of a deceased partner.¹⁰ If any partner is a trust, another partnership, or a disregarded entity, you cannot elect out.

Build the Numbers That Feed Form 1065 and the K-1s

Everything on Form 1065 traces back to the LLC’s books. Five categories cover almost all of it, and the sum of every K-1 has to match the partnership-level totals on Schedule K before you file. Mismatches are one of the fastest ways to attract IRS attention.

Ordinary Business Income or Loss

Start with the income statement. Gross revenue minus operating expenses (rent, utilities, supplies, wages, and so on) produces ordinary business income or loss. That figure lands on Line 23 of Form 1065, after total deductions come off on Line 22.⁷

Separately Stated Items

Some income and deductions cannot be folded into the ordinary income figure because they get special treatment on each member’s personal return. Capital gains and losses, Section 179 depreciation, charitable contributions, and investment income such as interest and dividends each get broken out on Schedule K and reported in matching boxes of the K-1.

Depreciation is a large piece of this in 2026. The One Big Beautiful Bill Act restored 100% bonus depreciation for qualifying property acquired after January 19, 2025, and made it permanent.¹¹ The partnership can deduct the full cost of eligible property in the year it is placed in service.

Guaranteed Payments

A fixed payment to a member for services or capital use — paid whether or not the LLC profits — is a guaranteed payment. The partnership deducts it on Line 10 of Form 1065, and the recipient reports it as ordinary income through Box 4 of the K-1.⁷ Guaranteed payments also count toward the recipient’s self-employment income.

Capital Accounts

Each member’s capital account tracks their financial stake: contributions in, distributions out, share of income and losses, and non-deductible expenses. The IRS requires the tax-basis method for reporting capital accounts on Item L of Schedule K-1.¹² This accounting drives outside basis, which governs how much loss a member can deduct and whether a distribution is taxable.

Liability Allocations

The LLC’s debts get allocated among the members, and each allocation increases that member’s basis. Recourse liabilities (where a specific member bears the economic risk of nonpayment) go to that member. Nonrecourse liabilities (where no member is personally on the hook) split according to each member’s profit share. Both appear in Box K of Schedule K-1.¹²

Report the K-1 on Each Member’s Form 1040

Once you get your K-1, the numbers spread across several schedules of your personal return depending on the type of income.

Schedule E and the Other Schedules

Your share of ordinary business income or loss from Box 1 of the K-1 goes on Schedule E, Part II (Supplemental Income and Loss).¹³ Interest and dividends flow to Schedule B, capital gains to Schedule D, and guaranteed payments show up as ordinary income.

Qualified Business Income Deduction

Eligible members can deduct up to 20% of qualified business income from the LLC under Section 199A.¹⁴ The One Big Beautiful Bill Act made this deduction permanent starting with the 2026 tax year. Income thresholds and limits based on the business’s wages and property still apply, and specified service trades (law, accounting, health, and others) face phase-outs at higher income levels. The relevant QBI figures appear in Box 20 of the K-1.

Self-Employed Health Insurance

Health insurance premiums the LLC pays for a member, their spouse, dependents, or children under age 27 show up in Box 13, Code M of the K-1.¹² The member deducts those premiums on Schedule 1 of Form 1040 as an above-the-line deduction, no itemizing required. Any portion not deducted there can go on Schedule A if you itemize.

Passive Activity Limits

If you do not materially participate in the LLC’s business, your share of the income is passive. Passive losses can offset only passive income, not wages or other active income.¹⁵ Unused passive losses carry forward to future years or until you dispose of your entire interest.

Self-Employment Tax and the Extra Medicare Layers

Active LLC members owe self-employment tax on their share of ordinary business income plus any guaranteed payments. The rate is 15.3%: 12.4% Social Security on earnings up to the 2026 wage base of $184,500, and 2.9% Medicare with no cap.¹⁶ You calculate this on Schedule SE and pay it with your Form 1040. One-half of the SE tax you pay is deductible on Schedule 1, Line 15.

An additional 0.9% Medicare tax applies to self-employment income above $200,000 for single filers or $250,000 for married couples filing jointly.¹⁷ This one is not deductible, and the thresholds are not indexed for inflation.

Passive members face a separate 3.8% net investment income tax on their passive partnership income when modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly).¹⁸ Active members generally do not owe it because SE tax applies instead. These thresholds are also not inflation-adjusted.

Quarterly Estimated Payments

K-1 income has no withholding, so members generally need quarterly estimated payments. For the 2026 tax year the deadlines are April 15, June 15, and September 15 of 2026, and January 15, 2027.¹⁹

You avoid the underpayment penalty if the balance due at filing is under $1,000, or if your estimated payments equal at least 90% of the current year’s tax or 100% of the prior year’s tax (whichever is smaller).²⁰ The prior-year safe harbor rises to 110% if your prior-year adjusted gross income exceeded $150,000 ($75,000 if married filing separately).

Basis Governs Losses and Distributions

Your basis in the LLC is your investment balance: cash and property contributed, plus your share of LLC liabilities and income, minus your share of losses and distributions received. You can only deduct LLC losses up to your adjusted basis at year end.²¹ Losses that exceed basis are suspended and carry forward until basis rebuilds through future income or new contributions.

Distributions work the same way in reverse. A distribution is tax-free up to your basis. Anything above your remaining basis is taxed as a capital gain. Members who do not track basis year over year risk either overstating loss deductions (which produces penalties on audit) or paying tax on distributions that should have been tax-free.

State Returns and Out-of-State or Foreign Members

Beyond federal, the LLC generally files a state partnership return in every state where it does business. State returns typically start from Form 1065 figures and layer on state-specific adjustments. Whether a state return is required depends on nexus, which can be triggered by physical presence, employees, or economic activity above a revenue threshold.

Many states also charge entity-level fees or taxes on LLCs regardless of income — annual report fees, franchise taxes, or business privilege taxes. Amounts range from nominal to several hundred dollars a year. Missing them can cost the LLC its good standing, which may expose members to personal liability.

If any member is a foreign individual or entity, the LLC must withhold on the partnership’s effectively connected taxable income allocated to that partner and report it on Forms 8804 and 8805. The withholding rate is 37% for non-corporate foreign partners and 21% for corporate foreign partners.²² These forms follow the same March 15 deadline as Form 1065, and tax treaties may reduce or eliminate withholding for members from certain countries.

Nonresident state members create their own layer. Most income-tax states require the LLC either to withhold state tax on income allocated to out-of-state members or to file a composite return covering them. The specifics vary by state, and an LLC with members across several states should expect state partnership filings in each state where it operates.

Employment Taxes if the LLC Has Employees

Hiring employees beyond the members opens a separate set of obligations that run on their own calendar. The LLC withholds federal income tax, Social Security tax (6.2%), and Medicare tax (1.45%) from employee wages, matches the Social Security and Medicare portions, and reports the combined taxes quarterly on Form 941. Deposits go monthly or semi-weekly depending on the LLC’s tax liability during a lookback period, and any single day of $100,000 or more in accumulated payroll taxes triggers a next-business-day deposit.²³

Federal unemployment tax (FUTA) applies to the first $7,000 of each employee’s annual wages. The base rate is 6.0%, but a credit of up to 5.4% for state unemployment taxes brings the effective rate down to 0.6% for most employers.²⁴ FUTA is reported annually on Form 940. None of this applies to the members’ own K-1 income — members are not W-2 employees of their own LLC.

1
Internal Revenue Service. LLC Filing as a Corporation or Partnership
2
Internal Revenue Service. About Form 2553, Election by a Small Business Corporation
3
Internal Revenue Service. About Form 8832, Entity Classification Election
4
Internal Revenue Service. About Form 1065, U.S. Return of Partnership Income
5
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Internal Revenue Service. About Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns
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8
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10
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11
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12
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13
Internal Revenue Service. About Schedule E (Form 1040), Supplemental Income and Loss
14
Internal Revenue Service. Qualified Business Income Deduction
15
Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited
16
Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
17
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18
Internal Revenue Service. Questions and Answers on the Net Investment Income Tax
19
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20
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21
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22
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23
Internal Revenue Service. Employment Tax Due Dates
24
Internal Revenue Service. Topic No. 759, Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return