When launching a multi-owner business, one of the most important tax decisions you’ll make is choosing your business entity type—and with that, the appropriate IRS tax form. Two of the most commonly confused forms are Form 1120S (for S corporations) and Form 1065 (for partnerships). This guide outlines the key differences between these forms in 2025, helping you understand which one applies to your business, how each is filed, and what it means for your tax reporting and liability.
📄 What Is Form 1120S?
Form 1120S is the U.S. Income Tax Return for an S Corporation. It’s filed by businesses that have elected to be taxed as an S corp under Subchapter S of the Internal Revenue Code. An S corporation passes its income, losses, deductions, and credits through to its shareholders, who report them on their personal tax returns.
📄 What Is Form 1065?
Form 1065 is the U.S. Return of Partnership Income. It’s used by businesses structured as partnerships (including most multi-member LLCs by default). Like S corps, partnerships are pass-through entities, and profits are divided among partners who report their share on their personal returns.
🏢 Entity Type and Legal Structure
| Aspect | Form 1065 | Form 1120S |
|---|---|---|
| Used By | General partnerships, LPs, multi-member LLCs (default) | Corporations or LLCs that have filed Form 2553 to elect S corp status |
| Legal Structure Required | Two or more owners, no corporate election | Must first be a domestic corporation or LLC that elects S corp |
| Number of Owners | Two or more (no max) | Up to 100 shareholders (individuals only in most cases) |
🧾 Filing Requirements
- Form 1065 Due Date: March 17, 2025 (for calendar-year filers)
- Form 1120S Due Date: March 17, 2025 (same as partnerships)
- Extension available via Form 7004 (6 months)
💰 Ownership and Profit Allocation
This is where one of the biggest differences appears:
- Form 1065: Profits and losses are split according to the partnership agreement. Allocation does not have to match ownership percentages.
- Form 1120S: Profits and losses are distributed strictly according to stock ownership percentage (e.g., a 60% shareholder receives 60% of income).
📦 Employment and Payroll Rules
- Partnerships (1065): Partners are not considered employees. They receive guaranteed payments and self-employment income.
- S Corporations (1120S): Owners who work in the business must be treated as employees and paid a “reasonable salary” subject to payroll taxes. Remaining profit is passed as a distribution.
📋 Schedule K-1 Differences
Both forms issue a Schedule K-1 to each owner, but with slight differences:
- Form 1065 – K-1 (Form 1065): Reports each partner’s share of income, losses, credits, and self-employment earnings.
- Form 1120S – K-1 (Form 1120S): Reports shareholder’s share of S corp income, deductions, and credits—not subject to SE tax.
💵 Self-Employment Tax Differences
| Tax Category | Partnership (1065) | S Corporation (1120S) |
|---|---|---|
| Self-Employment Tax | Applies to entire share of earnings | Applies only to wages paid; distributions are not subject |
| Payroll Taxes | N/A (partners are not employees) | Required for owner-employees receiving salaries |
📈 Tax Planning Implications
S corporations are often used for self-employment tax reduction. By paying owners a reasonable salary and taking the rest of the income as distributions, businesses can avoid the 15.3% self-employment tax on a portion of profits. However, stricter compliance and payroll reporting are required.
Partnerships, while more flexible in profit-sharing and management, are subject to full SE tax on earnings and offer fewer tax planning opportunities.
🧮 Example Comparison
Scenario: Two owners, $200,000 net profit
- Partnership (1065):
- Each partner receives $100,000
- Both owe self-employment tax (~$15,300 each)
- S Corporation (1120S):
- Each owner paid $60,000 salary (subject to payroll tax)
- Remaining $40,000 paid as distribution (not subject to SE tax)
- Total SE tax savings: ~$6,000 per owner
📑 Pros and Cons Summary
| Feature | Form 1065 (Partnership) | Form 1120S (S Corp) |
|---|---|---|
| Flexibility in profit allocation | ✅ Yes | ❌ No (must match ownership %) |
| Payroll required for owners | ❌ No | ✅ Yes |
| Subject to SE tax | ✅ Entire profit | ❌ Only salary portion |
| Administrative complexity | Low | High (payroll, filings) |
| IRS scrutiny (reasonable salary) | Low | High |
🔍 People Also Ask (FAQs)
Q: Can a multi-member LLC choose between 1065 and 1120S?
A: Yes. By default, a multi-member LLC files Form 1065, but it can elect to be taxed as an S corporation by filing Form 2553.
Q: Which form is easier to file?
A: Form 1065 is typically simpler and has fewer compliance burdens, especially if there’s no payroll involved.
Q: Which structure saves more in taxes?
A: S corporations often provide tax savings by reducing self-employment tax, but require proper salary and tighter compliance.
Q: Can I switch from a partnership to an S corp later?
A: Yes, but it may involve reformation of the entity, EIN changes, and formal elections. Always consult a tax advisor before switching.
📘 Final Thoughts
Choosing between Form 1120S and Form 1065 hinges on your business goals, tax planning needs, and administrative capacity. Partnerships offer flexibility and simplicity, while S corporations can offer tax savings with added complexity. Whichever you choose, file accurately, stay compliant, and revisit your structure periodically as your business grows.
Need help deciding between 1065 and 1120S? Speak with a CPA or tax advisor to evaluate your situation and ensure you’re choosing the best path for your business in 2025 and beyond.
