A limited liability partnership pays no federal income tax of its own. The IRS treats every LLP as a pass-through entity, so the firm’s profits, losses, deductions, and credits land on each partner’s personal return and are taxed at individual rates. The partnership itself files an information return, issues a Schedule K-1 to every partner, and writes no income tax check. Everything else about limited liability partnership tax, from self-employment tax to quarterly estimates to state fees, follows from that one classification.1Office of the Law Revision Counsel. 26 USC 701 – Partners, Not Partnership, Subject to Tax
How the IRS Classifies an LLP
Under federal law, a partnership “as such shall not be subject to the income tax.” Each person carrying on business as a partner owes income tax only in their individual capacity.1Office of the Law Revision Counsel. 26 USC 701 – Partners, Not Partnership, Subject to Tax The LLP files Form 1065 to show its total revenue and expenses, but every dollar of net income passes through to the partners on their Forms 1040.2Internal Revenue Service. Partnerships
Pass-through status is the default, not a lock. An LLP can file Form 8832 to elect treatment as an association taxable as a corporation, or file Form 2553 to elect S-corporation status.3Internal Revenue Service. About Form 8832, Entity Classification Election Once a partnership elects corporate classification, it generally cannot switch back for five years, and the S-corporation election imposes ownership rules that most multi-partner professional firms would struggle to satisfy. For the rest of this article, assume the default pass-through treatment.
What Each Partner Owes on Their Share
Each partner’s slice of partnership income, gains, losses, deductions, and credits is called a distributive share. The partnership agreement controls how these items are divided. If the agreement is silent on a particular item, the IRS allocates it based on each partner’s overall interest in the partnership.4Office of the Law Revision Counsel. 26 USC 704 – Partners Distributive Share
The critical detail: your distributive share is taxable to you in the year the partnership earns it, whether or not any cash reaches your bank account. A partner with a 30-percent interest in an LLP that earns $500,000 owes tax on $150,000 even if the partnership retains every dollar for operations. This surprises new partners more than almost anything else in partnership taxation, and it drives the quarterly estimated payment schedule discussed below.
Self-Employment Tax
Partners who actively work in the business owe self-employment tax on their share of partnership trade or business income. The rate is 15.3 percent: 12.4 percent for Social Security and 2.9 percent for Medicare.5Office of the Law Revision Counsel. 26 USC Chapter 2 – Tax on Self-Employment Income
The 12.4-percent Social Security portion applies only up to the annual wage base, which adjusts each year for inflation. The 2.9-percent Medicare portion has no cap. Partners with income above $200,000 (single) or $250,000 (married filing jointly) also owe an additional 0.9-percent Medicare surtax on earnings above those thresholds.
Before calculating the tax, you multiply your net self-employment earnings by 92.35 percent. That adjustment reflects the fact that employees have half their payroll taxes paid by an employer, while self-employed individuals pay both halves. You can then deduct half of your total self-employment tax as an adjustment to income on Form 1040, which reduces adjusted gross income even if you don’t itemize.6Office of the Law Revision Counsel. 26 US Code 1402 – Definitions
Guaranteed Payments
Many LLPs pay partners a fixed amount for services or for the use of capital, separate from any distributive share. These guaranteed payments function like a salary in that they’re determined without regard to whether the partnership turns a profit. A firm that pays each equity partner $15,000 per month before dividing remaining profits is making guaranteed payments.
Guaranteed payments are always subject to self-employment tax, even when paid to a partner who might otherwise qualify as a limited partner exempt from self-employment tax on their distributive share. The partnership deducts guaranteed payments as a business expense, which reduces the remaining income available to allocate among all partners. For the partner receiving them, guaranteed payments appear on Schedule K-1 and are reported as ordinary income on the individual return.
The Qualified Business Income Deduction
Partners in an LLP may qualify for a deduction of up to 20 percent of qualified business income under Section 199A. This deduction reduces taxable income without reducing adjusted gross income or self-employment tax. For 2026, partners with taxable income below $201,750 (single) or $403,500 (married filing jointly) can generally claim the full deduction without additional limitations.
Above those thresholds, the deduction is limited to the greater of 50 percent of the W-2 wages paid by the business, or 25 percent of W-2 wages plus 2.5 percent of the cost of qualified business property. For professional service firms such as law practices, accounting firms, and consulting businesses, the deduction phases out entirely once taxable income reaches $276,750 (single) or $553,500 (married filing jointly). These fields are classified as “specified service trades or businesses,” and the IRS treats them less favorably at higher income levels because the principal asset of the business is the reputation or skill of its owners. Most LLPs sit in these fields, so partners above the upper threshold get no Section 199A benefit at all.
Partner Basis and Loss Deductions
Every partner has an outside basis in their partnership interest, which is a running account of the investment. Basis starts with whatever cash or property you contributed. It increases when you contribute more capital, when your share of partnership liabilities increases, and when the partnership allocates income to you. It decreases when you receive distributions, when your share of liabilities drops, and when the partnership allocates losses to you.7Internal Revenue Service. Partners Outside Basis
You cannot deduct partnership losses beyond your basis. If the LLP allocates $80,000 in losses to you but your basis is only $50,000, you deduct $50,000 and carry the remaining $30,000 forward until your basis recovers. Basis can never drop below zero. Partners tend to neglect basis records until they try to deduct a large loss or sell their interest, at which point reconstructing years of activity gets expensive.
Form 1065, Schedule K-1, and Deadlines
The LLP files Form 1065 as its annual information return. This form reports gross receipts, cost of goods sold, ordinary business expenses, and net income or loss, along with partner ownership percentages, capital account balances, and distributions.8Internal Revenue Service. Form 1065 – US Return of Partnership Income
From Form 1065, the partnership generates a Schedule K-1 for every person who held a partnership interest at any point during the tax year. The K-1 breaks down each partner’s distributive share of income, deductions, credits, and other items they need to report on their individual return. Partners cannot file accurately without this document, which is why late K-1 delivery is a common source of friction.9Internal Revenue Service. Instructions for Form 1065 – Introductory Material
Form 1065 is due by the fifteenth day of the third month after the partnership’s tax year ends. For calendar-year partnerships, that’s March 15.10Internal Revenue Service. Starting or Ending a Business Filing Form 7004 before the deadline grants an automatic six-month extension, pushing the due date to September 15 for calendar-year filers.11Internal Revenue Service. About Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns The extension only extends the filing deadline; it does not extend the time for partners to pay their individual tax.
Missing the deadline without an extension triggers a penalty of $255 per partner for each month or partial month the return is late, up to twelve months. A ten-partner LLP that files four months late would face a penalty of $10,200. The IRS assesses it automatically.12Internal Revenue Service. Failure to File Penalty
Quarterly Estimated Tax Payments
No employer withholds taxes from partnership income, so each partner covers their income tax and self-employment tax through quarterly estimated payments. The IRS expects these four times per year, typically due April 15, June 15, September 15, and January 15 of the following year.
To avoid an underpayment penalty, you need to pay at least 90 percent of your current-year tax liability or 100 percent of your prior-year liability through estimated payments and withholding. If your adjusted gross income exceeded $150,000 in the prior year, that prior-year safe harbor rises to 110 percent. Partners with variable income often find the prior-year safe harbor simpler, since predicting current-year partnership income before the books close is difficult.
Underpayment penalties are calculated quarter by quarter, so catching up later in the year does not erase interest on earlier shortfalls. Partners who receive large year-end allocations are especially exposed.
State-Level Taxes and Fees
Federal pass-through treatment does not control what happens at the state level. Many states impose obligations directly on the partnership entity, separate from what the partners owe on their individual state returns. These vary widely and can include:
- Annual registration or filing fees: Most states require LLPs to pay an annual fee to maintain registered status. These range from under $50 to several thousand dollars.
- Franchise or privilege taxes: Some states charge a tax for the privilege of doing business as a liability-protected entity, often as a flat minimum that applies regardless of income.
- Entity-level income taxes: A smaller number of states assess income tax directly on the partnership’s net earnings before the remaining income passes through.
Failing to pay these fees or file the required annual reports can result in the state administratively dissolving the partnership, which strips away the liability protection that made the LLP structure worth choosing. Partners in multi-state LLPs should also be aware that states where the partnership conducts business may require the entity to register as a foreign LLP and pay that state’s fees.
Pass-Through Entity Tax Elections
Most states now offer a pass-through entity tax election that lets the LLP pay state income tax at the entity level on behalf of its partners. This exists as a workaround to the federal cap on state and local tax deductions. When the partnership pays state tax at the entity level, the payment is deductible as a business expense on the federal return, reducing taxable income that flows through to partners. Because the deduction is taken by the entity rather than the individual, it isn’t subject to the individual SALT cap.
The mechanics vary by state. Some states make the election on the partnership return; others require a separate filing. The partnership typically receives a credit or exclusion that prevents the same income from being taxed twice at the state level. For partners in high-tax states whose individual SALT deduction would otherwise be capped, the election can produce meaningful federal savings. Whether it makes sense for a particular LLP depends on the partners’ individual tax situations, so model the numbers both ways before committing.