If you have clients involved in a partnership, multi-member LLC, S corp, you’ll want to make sure you’re familiar with Schedule K-1. Here’s what it is, when to use it, and how it works.
What is a K-1?
Schedule K-1 is an IRS form used to report “pass-through” earnings to the IRS for tax purposes. Most businesses in the U.S. fall under the “pass-through” business category, meaning they aren’t taxed at the corporate income tax rate. Instead, the business entity doesn’t pay taxes on its earnings – it “passes them through” to the stakeholders (i.e., partners and investors), who then pay the taxes as part of their income tax. In the case of sole proprietorships or single-member LLCs, these earnings will be reported on a Schedule C of Form 1040. But when that “pass-through business” is a partnership, multi-member LLC, or S corp, it takes a bit more work to calculate how earnings and taxes are split among the partners and investors. This is where Schedule K-1 comes in.
The form details the earnings of individuals with interest or ownership in these businesses and makes the individuals responsible for paying taxes due on earnings rather than the business entity. The specific earnings amounts paid to each individual are detailed on the K-1 and other forms so that the IRS can apply appropriate taxes. When you enter information from a K-1 into your TaxSlayer Pro software, all relevant information will automatically pull to the appropriate line on the client’s Form 1040. `
Who receives a Schedule K-1?
A separate Schedule K-1 is prepared and filed for each partner or other people who receive ownership income (i.e., not wages or bonuses) from a business. It is completed by an accountant and filed with Form 1120-S (for S Corporations) or Form 1065 (for Partnerships).
Partners and shareholders will use a Schedule K-1 to report important earnings information on their tax returns (Form 1040). These forms are used to calculate the taxes owed.
Partnership agreements and the Schedule K-1
Partnership agreements are used by certain types of businesses to state the ownership, interests, drawings, and other factors of how business owners will run the business and receive earnings. The amounts and information reported on Schedule K-1 will be influenced by the original partnership agreement and any subsequent changes. For example, if there are two partners with equal ownership and the business distributed $200,000 between them, each partner would detail the $100,000 earned on Schedule K-1.
Schedule K-1s (Form 1041) for trust and estate beneficiaries
Schedule K-1s are sometimes also provided to trust and estate beneficiaries. If a trust or estate passes income to beneficiaries that have not been fully taxed, the beneficiaries will report that income on a Schedule K-1 as part of Form 1041.
What is included in Schedule K-1?
Note that the specific details captured and reported in a Schedule K-1 may vary, depending on whether it is filed with a Form 1065 for partnerships and LLCs, a Form 1120-S for S corporations, or a Form 1041 for trust and estate beneficiaries. However, all Schedule K-1s do capture detailed information about types of earnings, deductions, and losses for accurate reporting.
Schedule K-1s filed with Form 1065 detail a partner’s share of income, deductions, credit, etc. This includes:
- Ordinary business, rental, and real estate income
- Guaranteed payments and interest income
- Dividends and dividend equivalents
- Short- and long-term capital gains and losses
- Other items including royalties, collectibles, self-employment earnings, other income, and deductions
How different types of business entities file Schedule K-1
Sole-proprietors & Single-member LLCs
Sole-Proprietors and Single-member LLCs do not file a Schedule K-1. Instead, they report business income on a Schedule C of a Form 1040.
Partners report business income on a Schedule K-1 as part of Form 1065 and include that when filing Form 1040.
LLC members report business income on a Schedule K-1 as part of Form 1065 and include that when filing Form 1040.
S corporation owners report business income on a Schedule K-1 as part of Form 1120-S and include that when filing Form 1040.
When are K-1s Due?
Businesses must file a Schedule K-1 along with Form 1065 or Form 1120-S on the 15th day of the 3rd month after tax year-end. They should file both with the IRS and provide copies to all relevant individuals by this date. (In some cases, they can request a six-month extension.)
The individuals must then include the information from the Schedule K-1s in their Form 1040s and file by Tax Day, usually April 15.
For more on Schedule K-1 from TaxSlayer Pro, see our detailed support pages:
- Schedule K-1 (Form 1065) – Overview
- Schedule K-1 (Form 1065) – Heading Information
- Schedule K-1 (Form 1065) – Income (Loss) Items
- Schedule K-1 (Form 1065) – Deductions
- Schedule K-1 (Form 1065) – Self-Employment Earnings (Loss)
- Schedule K-1 (Form 1065) – Credits & Foreign Transaction Items
- Schedule K-1 (Form 1065) – Alternative Minimum Tax (AMT) Items
- Schedule K-1 (Form 1065) – Tax Exempt Income, Non-Deductible Expenses, Distributions & Other Items
This article was last edited on September 28, 2021.