Where to put self-employment income from Schedule K-1?

[deltaone23]

I have a question regarding self-employment income and the correct way to input that income in the TurboTax software for my specific situation. I operate a single-member LLC that is a disregarded entity for tax purposes which provides consulting and other services. That LLC is in turn a member in a multi-member LLC that is taxed as a partnership (Form 1065). I received a Schedule K-1 from the partnership (which was sent to me directly because my single-member LLC is a disregarded entity). I believe I need to report the income from the Schedule K-1 on my Schedule C since I materially participated in the business and the income is subject to self-employment taxes.

I assumed that when I go into TurboTax Online and go to Self-Employment, there would be an option there to indicate that the source of the income was from a K-1, but that isn’t an option (it only has 1099, 1099-NEC, etc.). What are the right steps to get TurboTax to fill out the forms in the right way?

[MinhT1]

As your single-member LLC is a disregarded entity, all income and expenses are reported on your personal tax return. The income and expenses of the LLC are reported on Schedule C. 

And the Schedule K-1 from your LLC's participation in the multi-member LLC is reported in the K-1 section of your personal return. The LLC's share of earnings reported in box 14 of the Schedule K-1 is subject to self-employment tax.

In TurboTax Online, you can enter your Schedule K-1 by following these steps:

1. Open your tax return
2. Click on Federal in the left-hand column, then on Wages & Income
3. Locate the section S-Corps, Partnerships, and Trusts and click on the arrow on the right
4. Click Start next to Schedule K-1
5. Choose the correct form for your Schedule K-1 (Form 1065, 1120S or 1041)

[deltaone23]

Thanks for the reply. The thing is, the income on the Schedule K-1 is the income of the LLC. So do I report that income in the K-1 section of my personal return (which I think will go to Schedule E), or should I not report it there and instead report it on Schedule C? 

Or if the answer is "both", how do I make sure that I am not taxed twice on the income?

[PatriciaV]

If all the income of your SMLLC is reported by the multi-member LLC, you should enter only the information from Schedule K-1 for that investment. 

Are you paid by the parent LLC? If so, are those considered guaranteed payments reportable on Schedule K-1? This income is considered self-employment and is subject to Self-Employment taxes.

Yes, Schedule K-1 activity is reported on Schedule E of an individual's tax return.

[KennyGee]

How about if there are expenses to offset that SE K1 income?

[PatriciaV]

According to the IRS Instructions for Schedule E: "You can deduct unreimbursed ordinary and necessary partnership expenses you paid on behalf of the partnership on Schedule E if you were required to pay these expenses under the partnership agreement. You can only deduct unreimbursed expenses on Schedule E that are trade or business expenses."

If the LLC agreement does not allow for payment of unreimbursed expenses by a member, those expenses are no longer deductible. Under the Tax Cuts and Jobs Act, the itemized deductions for job-related expenses subject to the 2% of AGI floor are suspended for expenses incurred after December 31, 2017 through 2025.

TurboTax will ask you about unreimbursed expenses at the end of the Schedule K-1 entry process.

@KennyGee 

[wsalopek]

Step "3" does not exist.

[JamesG1]

What "Step 3" are you referring to?  Please post and someone will try to assist you.

Are you referring to this above?

1. Locate the section S-Corps, Partnerships, and Trusts and click on the arrow on the right

If so, you will not see that option in TurboTax Online, unless you have the Premium version of the software.

@wsalopek 

[darwin2902]

I have the same issue.

Let's assume all the income for my SMLLC comes from a multi-member LLC (K-1). I would then report the Schedule K-1 activity on Schedule E. But now, what happen to my Schedule C report? I wouldn't report anything since all income for my SMLLC was from the multi-member LLC. Wouldn't this look suspicious to the IRS? Or do I report the multi-member income in Schedule E and any expenses in Schedule C? It will be the same thing as putting all income and expenses in Schedule E, but at least my SMLLC looks like is active. I still feel like we have to put something in the Schedule E saying that the income is tied to the SMLLC. Thoughts?

[PatriciaV]

The IRS considers you and the SMLLC to be the same entity. When you enter Schedule K-1 from the other LLC, you have reported that income on your tax return. If you were questioned about the lack of income, you have the K-1 as backup because here is no way to report the outside LLC activity on Schedule C for your SMLLC. Any expenses you have for your SMLLC would be reported on Schedule C. 

@darwin2902