Multi-member LLCs default to partnership taxation, which means the business files an informational return but doesn’t pay taxes itself. The tax obligation passes through to each member based on their ownership percentage or whatever allocation method your operating agreement specifies.

The LLC files Form 1065 with the IRS. This return reports total income, deductions, and credits for the business. It doesn’t calculate tax owed because partnerships don’t pay federal income tax at the entity level. Think of Form 1065 as a summary that tells the IRS how the business performed and how that performance gets divided among the members.

After filing Form 1065, the LLC generates a Schedule K-1 for each member. The K-1 shows that member’s share of income, deductions, losses, and credits. Each member takes their K-1 and reports those amounts on their personal tax return using Schedule E. The income gets taxed at each member’s individual tax rate.

The deadline matters here. Form 1065 is due March 15, not April 15. This earlier deadline exists because members need their K-1s to complete their personal returns. If the business files late, members can’t file their own returns on time. Late filing penalties for partnerships are steep at $220 per month per member in 2024. A three-member LLC that files two months late owes $1,320 in penalties before any tax is even calculated.

Members also need to pay self-employment tax on their share of business income. This 15.3% tax covers Social Security and Medicare. It applies to all active members unless you’ve elected S-corp treatment or the member qualifies as a limited partner under specific rules.

Most multi-member LLC members should make quarterly estimated tax payments. Income taxes aren’t withheld from partnership distributions the way they are from W-2 wages. If you wait until April to pay everything, you’ll face underpayment penalties. The IRS expects you to pay as you earn throughout the year.

Your operating agreement determines how income and losses get allocated. Most LLCs split everything based on ownership percentage. If you own 60% of the LLC, you report 60% of the income on your K-1. But operating agreements can create special allocations for things like guaranteed payments to members who work in the business. The tax treatment follows whatever your operating agreement specifies, as long as it has economic substance.

Some multi-member LLCs elect S-corporation tax treatment by filing Form 2553. This can reduce self-employment taxes for profitable businesses where members are actively working. Instead of all profit being subject to self-employment tax, you pay yourself a reasonable salary and take remaining profits as distributions. Whether this makes sense depends on your profit level and how much reasonable compensation would need to be.

Idaho also requires a partnership return at the state level. Between Form 1065, state filings, K-1 preparation, and quarterly estimated payments, the filing requirements add up quickly. This is why most multi-member LLC owners work with a Nampa business tax preparation service rather than handling everything themselves.

Getting the structure right from the start matters. A business tax preparation professional can make sure your operating agreement aligns with how you actually want to allocate income and help you avoid the penalties that catch partnership filers off guard.