How are tax treatments different for K-1's from an S Corp vs K-1's from an LLC?

Leah · #1 (**permalink**) 05-15-2007, 04:43 PM

I was wondering if there were different tax treatments for K-1's from an S Corporation vs a K-1 from an Limited Liability Company?

I already own an S corporation and was trying to form a new corporation and was wondering how the LLC K-1 would be treated differently on my personal tax return.

For your information, I would be actively involved in the business and the business would be profitable as well. Thanks for your reply.

TaxGuru · #2 (**permalink**) 05-26-2007, 02:05 PM

Dear Leah,

Thanks for the question, as such it is an excellant question. You are right in that both the S Corporation and LLC Partnership are similar in that both of them report a members income through a K-1, partnership share of distributive income or loss.

In this response, I am assuming that you are going to have a profit from the operations of both the S Corporations and LLC Partnership return.

The S Corporation would normally have a salary for its officer/president/owner, and this salary should be a reasonable salary per IRS code requirements. The salary is paid to the officer/president/owner via a payroll with the normal payroll taxes deductions along with Federal & State tax deductions. The S Corporation is further subjected to payroll taxes of this salary to its officer. if after taking into account operating expenses including officer salary, there is a residual profit, then this profit is reported on the K-1 for each member of the S corporation based on his ownership percentage.

The profit that is reported on a K-1 is not considered as a net self employment income and therefore, not subject to Self-Employment Taxes.

In the case of an LLC, no salary is required for the actively participating member, and profits are shared based on partnership agreements. The distributive share of the income however, is reported on the K-1 and this income is considered to be self-employment income and subject to Self-employment taxes.

This is the major difference between an S Corporation K-1 and an LLC K-1, and because of this, it would appear that the individual tax liabilities for member's of a profitable LLC would be substantial higher at year end. A considerable amount of tax planning is required for LLC owners to ensure that these individual federal income taxes are paid in a timely manner, through estimated tax payments so as to avoid penalties and interest.