Tax 101

Everything You Need to Know About Taxes (Without Falling Asleep)

Everything You Need to Know About Taxes

(Without Falling Asleep)

Welcome to Tax 101 — where we explain confusing tax concepts using actual human words. No accounting degree required. Grab a coffee (or something stronger), and let's decode the tax system together.

Key Tax Concepts Explained

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A Schedule K-1 (Form 1065) is like a W-2's cooler, more complicated cousin. When you're a partner in an LLC or partnership, the business doesn't pay taxes itself — instead, income and losses "pass through" to the partners. The K-1 is the form that tells you (and the IRS) exactly how much income, loss, deductions, and credits were allocated to you. Think of it as a report card from your business: "Here's your share of everything that happened this year." Your K-1 comes from Uplevel Digital Services LLC and shows your 42.5% share of the partnership's activity.

Uplevel Digital Services LLC is a multi-member LLC taxed as a partnership. That means the LLC itself files Form 1065 (the partnership return), but it doesn't pay federal income tax. Instead, all income, losses, deductions, and credits flow through to the individual partners based on their ownership percentages and the partnership agreement. Brandon owns 42.5% as a general partner and member-manager, which means he materially participates in the business. This is important because it determines whether income is "passive" or "nonpassive" — and for Brandon, it's all nonpassive (which means it's subject to self-employment tax, but also means losses aren't limited by passive activity rules).

Here's the deal: when you work for a company, your employer pays half of your Social Security and Medicare taxes (7.65%), and the other half (7.65%) comes out of your paycheck. But when you're self-employed, YOU pay BOTH halves — that's 15.3% total (12.4% Social Security + 2.9% Medicare). The IRS gives you a small break by only taxing 92.35% of your self-employment earnings (that's 100% minus the 7.65% "employer" share). So Brandon's $159,352 in SE earnings becomes $147,142 for tax purposes, resulting in about $22,513 in SE tax. The silver lining? You get to deduct half of that SE tax ($11,256) from your income. Self-employment tax: the joy of being your own boss AND your own employee.

The money trail goes like this: The LLC earns revenue and has expenses. What's left (profit or loss) gets divided among partners per the partnership agreement. Brandon's share shows up on Schedule K-1. The K-1 then feeds into multiple forms on your personal return: guaranteed payments ($175,377) and business loss ($-16,025) go to Schedule E. Self-employment earnings ($159,352) go to Schedule SE. Health insurance ($31,377) goes to Form 7206 then Schedule 1. The QBI loss ($-16,025) goes to Form 8995. It's like a river splitting into tributaries — all originating from one K-1 but flowing to different forms. The good news: once you understand the flow, filing gets way less scary.

This is a BIG one. Guaranteed payments ($175,377) are like a salary from the partnership — you get paid regardless of whether the business made a profit. They're always ordinary income, always subject to self-employment tax, and always nonpassive. Distributions, on the other hand, are withdrawals of your share of the partnership's accumulated profits or capital. Distributions are generally NOT taxed when you receive them (you already paid tax on the income that generated them). HOWEVER — and this is important — if you take out more than your basis (your "account balance" in the partnership), the excess becomes a capital gain. That's exactly what happened with the $443 excess distribution on Brandon's K-1. Your basis was $0, so every dollar over that became a taxable event.

Section 199A of the tax code gives a potential 20% deduction on "Qualified Business Income" from pass-through entities. Sounds amazing, right? Here's the catch for Brandon: guaranteed payments are EXCLUDED from QBI. Since Brandon's entire net income from the partnership comes from guaranteed payments ($175,377), and the business portion is actually a LOSS ($-16,025), the net QBI is negative ($-16,025). That means no deduction this year — BUT that loss carries forward to offset future positive QBI. File Form 8995 even with a $0 deduction to establish the carryforward. It's like planting a seed for future tax savings. The QBI deduction is now permanent thanks to the OBBBA (One Big Beautiful Bill Act) signed July 4, 2025.

How Your Money Flows

Business Income → K-1 → Personal Return → IRS

The Partnership

Uplevel Digital Services LLC files Form 1065 and issues K-1s to all partners. The LLC itself pays $0 in federal income tax — it all passes through to you.

Your K-1

Your K-1 is the bridge between the business and your personal return. It shows your 42.5% share of everything: income, losses, deductions, credits, and self-employment earnings.

Your Form 1040

K-1 data flows into multiple schedules and forms on your 1040. It's not one simple entry — it's more like 7 different form entries all originating from one K-1. That's why this app exists!

The Partnership

Uplevel Digital Services LLC files Form 1065 and issues K-1s to all partners. The LLC itself pays $0 in federal income tax — it all passes through to you.

Your K-1

Your K-1 is the bridge between the business and your personal return. It shows your 42.5% share of everything: income, losses, deductions, credits, and self-employment earnings.

Your Form 1040

K-1 data flows into multiple schedules and forms on your 1040. It's not one simple entry — it's more like 7 different form entries all originating from one K-1. That's why this app exists!

Tax Term Glossary

Fluent in tax-speak in 5 minutes

AGI (Adjusted Gross Income)

Your total income minus specific deductions (SE tax, health insurance, retirement contributions). It's the number the IRS uses to determine eligibility for credits and deductions. Think of it as your "tax identity."

Self-Employment Tax

The 15.3% tax (Social Security 12.4% + Medicare 2.9%) that self-employed people pay instead of FICA. It's calculated on 92.35% of net SE earnings. Brandon's: ~$22,513.

SALT (State & Local Tax)

State income taxes + property taxes you can deduct on Schedule A. The cap was $10K but the OBBBA raised it to $40K for 2025. Brandon's estimated SALT: ~$14,000.

QBI (Qualified Business Income)

Business income eligible for the Section 199A 20% deduction. Guaranteed payments are excluded, so Brandon's QBI is ($16,025) — a loss that carries forward to future years.

Basis

Your "account balance" in the partnership for tax purposes. It goes up with contributions and income, down with distributions and losses. Brandon's basis: $0. This means any future distributions over $0 = instant capital gain. Handle with care!

Material Participation

Working regularly, continuously, and substantially in the business. Brandon qualifies as a member-manager who materially participates, making all income nonpassive and all losses fully deductible (subject to basis limits).

Nonpassive Income

Income from a trade or business in which you materially participate. Unlike passive income, nonpassive income is subject to SE tax but isn't limited by passive activity loss rules.

Above-the-Line Deduction

A deduction taken BEFORE calculating AGI (on Schedule 1). These are the gold standard of deductions because they reduce your taxable income regardless of whether you itemize. Examples: half of SE tax, health insurance, retirement contributions.