Understanding K-1 Forms and Self-Employment Income for LLC Tax Filing

This is a common source of confusion! The K-1 forms and self-employment income are related but handled differently on your tax return. When you have an LLC taxed as a partnership (which is what your situation sounds like), each partner receives a K-1 showing their share of the business's profits, losses, and other items. But how you're taxed on that income depends on whether you're actively participating in the business. For you, since you materially participate in the business, your share of the LLC's ordinary business income (Box 1 of the K-1) is considered self-employment income and subject to self-employment tax (Medicare and Social Security taxes). For your husband who doesn't participate, his share is still reported as income but generally isn't subject to self-employment tax unless your operating agreement specifies otherwise or he's a general partner. When using TurboTax, you enter the K-1 information as provided, and the software should automatically calculate whether self-employment tax applies based on your answers to questions about material participation. You don't separately report the income again.

Just wanted to share my experience with this exact situation! I was completely overwhelmed by K-1 forms and self-employment taxes last year when my partner and I started our e-commerce business. I kept going in circles trying to figure out if I was doing it right in TurboTax. I finally found this tool called taxr.ai (https://taxr.ai) that actually analyzed our K-1 forms and explained exactly how the income should be reported. It showed me that my partner (who doesn't work in the business) wasn't subject to self-employment tax on his portion, which saved us almost $2,300! The service basically looks at your tax forms and explains in plain English what everything means and how to properly report it. It caught a couple issues our CPA missed too, which was pretty shocking.

Just wanted to update everyone! I decided to try taxr.ai after all and wow - totally worth it! It spotted that our CPA had incorrectly indicated that my husband's portion of our LLC income was subject to self-employment tax when it shouldn't have been. The system actually went through our K-1 forms and showed us exactly which boxes needed attention. It confirmed that since my husband doesn't materially participate, his share of income should only be reported for income tax purposes but not self-employment tax. This literally saved us over $1,800! It also explained exactly how to correct the entries in TurboTax. Super clear step-by-step instructions. Definitely cleared up all my confusion about K-1 vs self-employment income reporting.

If you're still struggling with getting answers about your K-1 and self-employment tax questions, you might want to call the IRS directly. I know, I know - everyone dreads calling them because it's impossible to get through. I spent DAYS trying last year with these exact same K-1 questions. Then I found this service called Claimyr (https://claimyr.com) that actually gets you through to the IRS without the endless hold times. They have this system that holds your place in line and calls you when an actual human at the IRS is about to pick up. You can see how it works here: https://youtu.be/_kiP6q8DX5c I was able to speak with an IRS tax specialist who walked me through exactly how to handle our LLC's K-1 forms and explained which portions were subject to self-employment tax. It was honestly a relief to get definitive answers straight from the source.

Wow, I need to eat my words about Claimyr. After my skeptical comment, I was still desperate to talk to the IRS about my LLC's K-1 situation, so I decided to try it anyway. I honestly can't believe it worked. After trying for weeks to get through on my own, Claimyr got me connected to an IRS tax specialist in about 3 hours. I didn't have to sit by the phone - they just called me when they were about to connect me. The IRS agent explained that since I don't materially participate in our family business (my spouse runs it), my portion of the K-1 income isn't subject to self-employment tax. This was exactly what I needed to know and will save us around $2,100 this year alone! The peace of mind from getting an official answer directly from the IRS was absolutely worth it. Just wanted to update since my previous comment was completely wrong.

I've been dealing with this exact issue for a few years with our LLC. Here's what I've learned: If you're set up as a partnership (which it sounds like you are), you need to file Form 1065 for the partnership. Then each of you gets a K-1. For the partner who materially participates (you), your share of ordinary business income from Box 1 of the K-1 flows to your Schedule E, but it's ALSO subject to self-employment tax via Schedule SE. For the non-participating partner (your husband), the income also goes on Schedule E, but generally isn't subject to self-employment tax (with some exceptions depending on your operating agreement). TurboTax should handle this correctly if you answer all the questions accurately. Just make sure when it asks about material participation, you indicate that only you materially participate.

Slightly different perspective here - we had a similar situation with our LLC and ended up amending our returns for the previous year because we had overpaid. One thing to check is whether your operating agreement specifically addresses self-employment tax for inactive members. Some operating agreements include language that makes all members subject to self-employment tax regardless of participation. If your agreement doesn't have this language, then typically only the materially participating member would pay self-employment tax on their share. TurboTax should ask about material participation when you enter the K-1 info. Be very clear about who does and doesn't participate. If you've already filed incorrectly for 2023, you can amend your return to get that money back.

I'm glad this thread has been so helpful! As someone who went through this exact confusion last year with our consulting LLC, I want to emphasize one more important point that saved us from a headache later. Make sure you keep detailed records of who does what in the business throughout the year. The IRS has specific tests for "material participation" and it's not just about ownership percentages. Since you mentioned you handle all day-to-day operations while your husband is completely hands-off, you should easily meet the material participation test. But document this! Keep records of hours worked, business decisions made, client communications, etc. If you ever get audited, you'll want to be able to clearly demonstrate the difference in participation levels between you and your husband. Also, double-check that your CPA marked the K-1 forms correctly in Box 14 - there should be codes that indicate whether the income is subject to self-employment tax. Code A usually means it is subject to SE tax, while other codes might indicate it's not. This affects how TurboTax processes the information. One last tip: if you're still uncertain after reviewing everything, consider having a second CPA review your situation. Sometimes a fresh set of eyes catches things the first preparer missed, especially with partnership taxation which can be tricky.

This is such a valuable discussion! I'm dealing with a similar situation with my design agency LLC. My business partner and I have a 60/40 split, but like your husband, my partner is completely uninvolved in operations - no client meetings, no project work, nothing. Reading through all these responses, I'm now questioning whether we've been handling our taxes correctly. We've been paying self-employment tax on both of our portions for the past two years because our CPA told us "all LLC members pay SE tax." But based on what everyone's saying here about material participation, it sounds like my partner shouldn't be paying SE tax on their share. The documentation point that Sophia made is really important too. I've been keeping detailed time logs and project records, but my partner literally has zero business-related documentation because they don't participate at all. That should make it pretty clear cut for the IRS if they ever questioned our material participation claims. I think I need to review our operating agreement and possibly amend our previous returns. Has anyone here actually gone through the amendment process for SE tax overpayment? Is it straightforward or should I expect complications?

This thread has been incredibly helpful! I'm dealing with a very similar situation with our photography LLC that my spouse and I started last year. I handle all the client work, editing, marketing, and bookkeeping while my spouse is basically a silent partner who just invested some startup capital. Our tax preparer told us we both needed to pay self-employment tax on our respective shares, but after reading through all these responses about material participation, I'm starting to think we might have overpaid. My spouse literally doesn't touch any aspect of the business operations. One question I have - does it matter that we're married filing jointly? I know the income all gets combined anyway, but I'm wondering if that affects how the self-employment tax is calculated for each partner's K-1 portion. Also, for those who have gone through amendments - did you need to provide specific documentation to prove non-participation, or was it enough to just state it on the forms? I'm trying to figure out if I should gather evidence before filing the amendment or if the IRS typically accepts these corrections without requesting additional proof. Thanks everyone for sharing your experiences - this has been way more helpful than the generic tax advice I've been finding elsewhere!

This has been such an enlightening thread! I'm in a nearly identical situation with our marketing consultancy LLC. My partner contributed initial funding but does zero operational work, while I handle everything - client acquisition, project delivery, invoicing, you name it. After reading through everyone's experiences, I'm pretty confident we've been overpaying on self-employment tax. Our accountant had us both paying SE tax on our K-1 portions, but it's clear my partner doesn't meet any material participation test. What really resonates with me is the documentation aspect several people mentioned. I've been inadvertently creating a perfect paper trail - all our client emails come through my business account, all project management is under my login, I'm the only one with QuickBooks access, etc. Meanwhile, my partner literally has no business-related digital footprint because they're completely uninvolved. I think I'll start by reviewing our operating agreement to make sure there's no language requiring all members to pay SE tax, then probably move forward with amending our 2023 return. The potential savings of $2,000+ that others mentioned would definitely make the amendment process worthwhile. Has anyone here worked with a CPA who specializes in partnership tax issues? I'm starting to think our current accountant might not be the best fit for LLC partnership taxation, especially after telling us "all members always pay SE tax" without considering material participation rules.

I've been following this discussion closely as someone who went through a similar situation with our family business LLC last year. Reading through all these experiences has been incredibly validating! We had the exact same issue - I run all operations of our consulting business while my spouse is purely an investor/silent partner. Our original CPA insisted we both pay self-employment tax, but after getting a second opinion from a partnership tax specialist, we discovered we'd been overpaying for two years. The key insight that helped us was understanding that material participation isn't just about ownership percentages - it's about actual involvement in business operations. The IRS has seven specific tests for material participation, and if you don't meet any of them, your K-1 income generally isn't subject to SE tax. For Jordan's original question about TurboTax - make sure when it asks about material participation, you're very specific about who does what. The software should handle the SE tax calculation correctly once it knows only you materially participate. One thing I haven't seen mentioned yet - if you do decide to amend previous returns, you can typically go back three years to claim refunds for overpaid SE tax. In our case, amending 2022 and 2023 got us back about $4,200 total. The process was straightforward and definitely worth the effort. The documentation suggestions everyone's shared are spot on. Having clear records showing the difference in participation levels gives you confidence if the IRS ever questions your filing position.