Key takeaways

  • The Schedule K-1 tax form is a document used to report an individual’s share of income, deductions, credits, and other tax items from “pass-through entities” such as partnerships, S corporations, or certain trusts and estates.
  • Individuals use the information on their Schedule K-1 regarding their share of income, losses, deductions, and credits to file their individual annual tax returns.
  • Depending on the scenario, income on a Schedule K-1 may be treated as self-employment income, earned income, or investment income.
  • The IRS requires that Schedule K-1 forms are filed by pass-through entities by March 15th each year unless an extension is filed.

Table of contents:

  1. What is a Schedule K-1 Tax Form Used For?
  2. Different Types of Schedule K-1 Forms
  3. Who Generates and Files a K-1 Form?
  4. Schedule K-1 Profit Allocation
  5. Self-Employment Tax on the K-1 Form
  6. Is Schedule K-1 Income Considered Earned Income?
  7. How Does Schedule K-1 Affect Personal Taxes?
  8. What Does Schedule K-1 Form Look Like?
  9. Schedule K-1 Form FAQs

What is a Schedule K-1 Tax Form Used For?

The Schedule K-1 tax form is a document used in the United States to report an individual’s share of income, deductions, credits, and other tax items from partnerships, S corporations, or certain trusts and estates.

It serves as a document for these entities, which are considered “pass-through” for tax purposes, to distribute their taxable income and losses to their partners, shareholders, or beneficiaries. The recipients then include this information on their own tax returns, ensuring that the income is taxed at the individual level, rather than at the entity level, preventing double taxation.

Example: How a Schedule K-1 Tax Form Works in a Partnership
Step 1: The partnership agrees on profit allocation The members of the partnership agree on their profit allocation and record the details in the pass-through entity’s governing agreement. Profit allocations may be based on factors such as the ownership stake, invested capital, or specific provisions outlined in the agreement.
Step 2: Partnership creates Schedule K-1 with form 1065 For informational purposes, the partnership files Form 1065 with the IRS, typically by March 15th of each year, along with a copy of the K-1 form for each partner. The partnership only provides information to the IRS and does not pay taxes on the income reported on K-1 forms.
Step 3: Partners receive Schedule K-1 for tax filing The partnership provides each partner their Schedule K-1 form and each partner uses the information regarding their share of income, losses, deductions, and credits to file their individual tax returns.

 

Different Types of Schedule K-1 Forms

The Schedule K-1 form varies based on the type of entity it’s associated with, each having a specific purpose:

Partnerships: Schedule K-1 Form 1065

Schedule K-1 Form 1065 is included in a partnership’s tax return to report each partner’s share of the partnership’s earnings, losses, deductions, and credits. It ensures that partnership income is taxed on the partners’ individual returns, maintaining the pass-through nature of the partnership’s taxation.

S-Corporations: Schedule K-1 Form 1120-S

Schedule K-1 Form 1120-S is used by S-corporations to report each shareholder’s share of the corporation’s income, losses, deductions, and credits. Since an S-corp enjoys pass-through taxation, this form allocates the income to shareholders for reporting on their personal tax returns.

Trusts and Estates: Schedule K-1 Form 1041

Schedule K-1 Form 1041 is used by trusts and estates to report income given to beneficiaries. All beneficiaries receive their K-1 Form 1041, ensuring that the income distributed to the trust and estate beneficiaries is taxed on individual tax returns. For example, a trust might pay tax at the trust level on capital gains but pass through dividends or interest to the beneficiaries.

Who Generates and Files a K-1 Form?

K-1 forms are generated by “pass-through” entities, including partnerships, S-corporations, trusts, and estates. The “pass-through” entity completes the appropriate K-1 form and provides it to its partners, shareholders, or beneficiaries to use when filing their personal tax returns.

Partnerships in the U.S. file Form 1065, which is an information return to report their income, gains, losses, deductions, and credits to the IRS. At this time, partnerships file a copy of Schedule K-1 (Form 1065) for each partner with the IRS.

Schedule K-1 Profit Allocation

The profit allocation is determined by the pass-through entity’s governing agreement (such as a partnership agreement or a trust document) and may consider factors such as the ownership percentage, invested capital, or specific provisions outlined in the agreement. The Schedule K-1 forms detail each partner’s or beneficiary’s share of the income, deductions, credits, and other tax items, reflecting their portion of the partnership’s financial activity for the year. 

Self-Employment Tax on the K-1 Form

Whether Schedule K-1 income is subject to self-employment tax depends on the nature of the income and the type of pass-through entity distributing it. For example, according to the IRS, limited partners don’t pay self-employment tax on their distributive share of partnership income, but do pay self-employment tax on guaranteed payments. Self-employment income is reported on line 14 labeled “Self-employment earnings (loss)” on a Schedule K-1 tax form.

It’s important to consult with a tax professional to understand the specifics of your self-employment income, as details can vary based on your participation in the business and the type of income received.

Is Schedule K-1 Income Considered Earned Income?

The reporting of earned income—which is all the taxable income and wages you get from working for someone else, yourself, or from a business you own—on a Schedule K-1 is dependent on the business structure. For example, income reported on a Schedule K-1 from an S-Corporation is not considered earned income for the individual shareholder. It is generally viewed as investment income rather than compensation. For partnerships, the scenario might differ as the partner’s involvement in the business can affect how income is taxed. Active participation in the business may result in income subject to self-employment taxes, whereas passive income typically would not.

How Does a Schedule K-1 Affect Personal Taxes?

The Schedule K-1 form outlines the income that beneficiaries need to report on their tax returns from pass-through entities like partnerships, S-corporations, or certain trusts and estates. The information provided on a K-1 must be included on their personal tax return. For instance, profits allocated to partners in a partnership are reported on their individual tax returns, and they are taxed on this amount regardless of whether the income was actually distributed to them.

What Does a Schedule K-1 Form Look Like?

Now that you know how the Schedule K-1 works, let’s take a look at the form itself. Below is a sample Schedule K-1 Form 1065 for partnerships. On the spectrum of tax forms, it is a fairly simple one-page form with only three sections. Tax preparers take the data from the K-1 form and enter it when filing taxes each year.

2023 Schedule K-1 Tax Form (Form 1065)

Schedule K-1 Form FAQs

There are many nuances with the Schedule K-1 form depending on your situation. Below are frequently asked questions about K-1s but for questions about your personal scenario, connect with a tax advisor.

What is a K1?

A K1 form, formally called a Schedule K-1, is a tax document used to report an individual’s share of income, deductions, and credits from entities like partnerships, S-corporations, or trusts.

How does K-1 loss affect my taxes?

Generally, a loss reported on a K-1 form from a partnership or S-corporation can be used to offset other income on your annual tax return, such as wages or salaries, thereby potentially reducing your overall taxable income. However, there are limitations and details to consider, making it a smart decision to consult with an expert tax advisor for your situation.

What is the difference between a k1 and a 1099?

A Schedule K-1 form is used to report an individual’s share of income, deductions, and credits from entities like partnerships, S corporations, or trusts. Conversely, a 1099 form is typically issued by businesses to report various types of income paid to individuals not classified as employees, such as freelancers or independent contractors.

When should I expect to receive my IRS Schedule K-1 Form?

You can expect to receive your IRS Schedule K-1 form by March 15th for partnerships, estates and trusts, and S-corporations. However, if an extension is filed, this due date may be extended to September 15th.

Harness Can Help You Understand Your Schedule K-1

As with any complex tax situation, it’s crucial to consult a tax advisor to ensure you file accurately and optimize your tax bill. At Harness, we connect you to tax advisors well-versed in Schedule K-1 forms and other complex tax matters such as partnerships, S corps, trusts, and estates. If you need guidance, book a one-hour Equity Tax Planning Session today to get started.

Tax related services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness”. Harness Wealth Advisers LLC is a paid promoter, internet registered investment adviser. This article should not be considered tax or legal advice and is provided for informational purposes only. Please consult a tax and/or legal professional for advice specific to your individual circumstances.