K-1 Tax Form Explained: What is It and Why is It Important?
May 02, 2023
The IRS regulates specific rules on tax returns for different business structures. An example is how the K-1 tax form is a must for business owners who are part of a partnership, LLC, or S corporation.
A corporation is taxed as a “person” or a separate legal entity. Meanwhile, in sole proprietorships, the business’s income is reported on the owner’s personal income tax return. Similarly, businesses run by partnerships are taxed on each owner’s respective income.
If you want to learn more about how partnerships and LLCs are taxed and how a K-1 tax form works, then you’ve come to the right place!
- The Schedule K-1 tax form is used to file tax returns for pass-through entities such as partnerships, S-corporations, and LLCs.
- There are three key types of K-1 tax forms: Form 1065, which is used for partnerships; Form 1120-S (Schedule B) for S-Corporations; and Form 1140 for trusts and estates.
- Filing for each of the Schedule K-1 tax forms entails specific requirements, including a profit and loss statement, an EIN, a product and service list, a balance sheet, etc.
- The deadline for filing Forms 1065 and 1120-S is on or before March 15, while the due date for filing Form 1140 is March 1.
What is Schedule K-1 Tax Form?
The Schedule K-1 tax form is a federal tax document used to file the tax returns of partnerships, S-corporations, and other pass-through entities. The form enumerates each shareholder’s or partner's total income, capital gain, losses, and dividends for the previous tax year.
The K-1 form is also used to list all the earnings disbursed from properties and treasuries to the recipients. Often, Schedule K-1 is confused with Form 1099; however, the latter is used to report non-employer payments or payments made by a business or an individual.
The following are some of the key pieces of information you can find on a K-1 form:
- Partnership EIN
- Partnership Address
Each Partner’s Individual Information
- Social Security Number or Tax Identification Number
- Address and ZIP code
- Partnership type
- Type of ownership (e.g., limited partner, general partner, member-manager, etc.)
- Capital gains
- Dividend Equivalents
- Interest income
- Ordinary business income
- Ordinary dividends
- Qualified dividends
Why is Schedule K-1 Tax Form Important?
Primarily, a Schedule K-1 Form is one of the many ways that the IRS can adjust the tax liability from the entity itself to the partnerships and shareholders who are making a profit or income out of business.
Business partnerships are formed by contracts that specify the shares and liabilities of each individual to whom the ownership, losses, and profits incurred by the business are divided.
In this manner, there is fairness and equal accountability when it comes to fulfilling the tax obligations tied to the business’s operations and generated income.
Since different types of business profits are reported on Form K-1, it also has variations depending on the business structure that uses it.
Different Types of Schedule K-1 Form
The different types of Schedule K-1 forms are Form 1065, Form 1120-S, and Form 1041. Each form underscores the distinctions between business partnerships. After all, partnerships are built on a specific set of agreements and foundations, as opposed to trusts, estates, and S-corporations.
Let’s briefly explore each K-1 tax form:
#1. K-1 Tax Form for Partnerships
Form 1065, U.S. Return of Partnership Income, is used to help identify the taxable income and obligations of each party comprising the partnership. Partnerships are considered by the IRS as pass-through entities, meaning that they do not fulfill actual taxes. Rather, businesses run by partnerships distribute tax credits, generated income, and losses.
#2. K-1 Tax Form for S-Corporations
Form 1120-S (Schedule B-1) itemizes the essential tax details to prevent S corporations from being taxed twice. Similar to a partnership, the profits of the S-corp are filed on each shareholder’s personal income tax returns. LLCs that choose to be taxed as S corporations are to use the same form to report their taxes.
Form 1120 also helps the IRS assess how ownership is subdivided among each shareholder.
#3. K-1 Tax Form for Trusts and Estates
Form 1041, Beneficiary’s Share of Income, Deductions, Credits, etc., reports the gains, income, deductions, and losses of an estate or trust. More specifically, the form helps to monitor the income earned by an estate following the estate owner’s passing and preceding the distribution of assets to the beneficiaries.
How to File Schedule K1-Forms
Here’s how to file your K-1 tax form. Note that all forms are available on the IRS website.
Print Form 1065 and fill it out with the important information. You can also file your 1065 tax form online if you have a partnership that’s composed of as many as 100 partners.
Among the key details you’ll need to prepare are a profit and loss statement for your net income, the year-end financial statements and deductible costs for your business partnership, your business code number, and your tax ID.
You’ll need the following information to fulfill your Form 1120-S:
- Balance sheet
- Product and service list
- Employer Identification Number (EIN)
- Date when your corporation was established
- Date when you were elected to an S corp
- Profit and loss statement
If you made at least $600 in payments to independent contractors, you need to provide a Form 1099 to each of the contractors whose services you hired.
#3. Beneficiaries of Trusts or Estates
If the beneficiary or trust makes an annual gross income that exceeds $600, then the representative or trustee must file Form 1041. Aside from the trust’s or estate's key information, all generated income and incurred deductions must also be enumerated in the form.
Taxes and payments are reported on Schedule G of the document.
Form 1041 consists of two copies: Copy A for the trusts’ or estates’ returns and Copy B, which is fulfilled for the beneficiaries.
K-1 Tax Form Deadline for the IRS
The deadlines for filing your K-1 tax form are as follows:
- LLCs, partnerships, and S-Corps that run from January 1 to December 31 (also called a calendar year business) have until March 15 to file Form 1065 and Form 1120-S. Businesses that use a fiscal year must file their tax returns on or before the 15th of the third month following the conclusion of the tax year.
- Representatives of trusts and estates have until March 1, 2024, to file their Form 1040 and fulfill their taxes.
If you’re wondering whether the income you report on your K-1 form passes as earned income, the answer is: yes. Keep in mind that it will be based on the structure of your business.
Earned income is likely considered for businesses that have a defined and equal share of profits, liabilities, assets, and obligations within the partnership. It is also more applicable to sole proprietors who are committed and proactively involved in keeping the business going.
Contrastingly, LLCs and recipients or beneficiaries of trusts and estates are not considered to generate earned income that is technically not earned or made through working. Another term for this could be “passive income,” which can be in the form of investments, earned dividends, or trust properties.
When Are You Supposed to Receive IRS Schedule K-1 Tax Form?
Since the deadlines for filing Schedule K-1 Tax forms are March 1 and March 15, respectively, you should expect to receive the said form on or before the said dates. If you wish to follow up on your form, you can contact the IRS at 1-800-TAX-FORM.
Your K-1 tax form should be at the top of your tax to-do list as a shareholder, a business partner, or a representative of a trust or estate. Have a clearly defined framework for your venture, and discuss the scope of your shares in responsibilities, income, losses, assets, and dividends with your partners to avoid any confusion once you file your taxes.
Don’t forget to keep a record of all your transactions and agreements. Lastly, try to determine whether to operate as a calendar year or fiscal year business to ensure you follow the correct deadline for your tax documents.