What is Schedule K-1?

Beneficiaries of a trust or estate will also receive a Schedule K-1 tax form. The K-1 tax form makes it easier to track and measure the contributions of a shareholder towards overall business performance. There are different types of K-1 tax documents available for different kinds of businesses.

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What Is It Used For?

Schedule K-1 reports each partner or shareholder’s profits, credits, and deductions in an entity to the Internal revenue service (IRS). In the case of a business that functions as a partnership, the partners should pay the taxes on behalf of the company. As a result, each partner must file this tax form to IRS.

Key Takeaways

  • The Schedule K-1 form is a tax form used to report a partner or shareholders’ profits or losses in a tax year.There are three types of K-1 forms- 1065 for partnerships, 1120- S for S corporations, and 1041 for beneficiaries of a trust or estate.A K-1 form needs to be filed by pass-through entities such as sole proprietorships, partnerships, LLCs, S-corporations, trusts, and estates.The K-1 and 1099 forms are often confused with each other. While the former needs to be filed by shareholders or partners, the latter is associated with individuals who are not considered an employee.

The Schedule K-1 form typically includes the following information –

  • DividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read moreIncome or losses receivedDeductionsGuaranteed paymentsInvested Interest (The percentage of ownership of business)

“Pass-through entities” or “flow-through entities” are businesses that qualify for and must use schedule K-1 tax forms because the tax liability is transferred to the investor. In cases where profits are passed to individuals, the partner will not be subject to double taxationDouble TaxationDouble Taxation is a situation wherein a tax is levied twice on the same source of income. It usually occurs when the same income is taxed both at corporate as well as at the individual level.read more that occurs with corporations. Instead, the partner will only be liable for personal tax, avoiding corporate taxes altogether.  Businesses that “pass-through” their income to their partners can thus avoid the corporate taxesCorporate TaxesCorporate tax is a tax levied by the government on the profits earned by a company at a fixed rate each year and is calculated in accordance with specific tax regulations.read more and pass those savings to the partners. Pass-through entities can include Sole Proprietorships, Partnerships, Limited Liability CompaniesLimited Liability CompaniesLLC stands for Limited Liability Company. A Limited Liability Company is a combination of partnership or sole proprietorship and a corporation and has emerged in the United States, in which the owners’ or investors’ liability is limited by the amount of stock they own or by any other defined means.read more (LLC), and S-CorporationsS-CorporationsS corporation refers to the special status entity exempted from paying corporate tax, which allows shareholders to be taxed only once when they receive the benefits by follow-through taxation, thereby avoiding double taxation at the corporate level under a special chapter of IRS so that all the rules specified in the chapter shall be complied with.read more.

Individuals who plan to invest in these types of businesses, such as shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read more or partners, need to realize how much of the entity’s income (or loss) they need to report on their tax returns. All K-1s need to provide accurate and comprehensive information on the tax return. The shareholders can use the information furnished in K-1 to file their separate tax returns.

Reasons One Would Receive a Schedule K-1 Form

A person receiving a schedule K-1 form needs to report it in the tax seasonTax SeasonThe term tax season refers to a short period in a tax year during which the individuals prepare and file tax returns of the previous tax year.read more since the income received is taxable income. The Internal Revenue Service (IRS) must have already been notified in this case.

A person receives the K-1 form for one of the following reasons.

  • If they are the beneficiary of a trust or estateIf they are the owner of a pass-through entityPass-through EntityThe pass-through entity can be defined as a process by which any organization is relieved from double taxation burden. In order to avoid the double taxation, business income is considered to be the personal income.read moreWhen they invests in an equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company’s balance sheet.read more

Depending on the reason someone receives this tax form, its information will vary.

Types of Schedule K-1

There are different types of Schedule K-1 tax forms available. The type of form varies depending on the type of business. The different types of K-1 forms include:

  • 10651120-S1041

#1 – 1065 Form

All types of partnerships and some LLCs use the 1065 tax form in order to report their portion of profits or losses for an accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company’s overall performance.read more. The partnership passes the earningsEarningsEarnings are usually defined as the net income of the company obtained after reducing the cost of sales, operating expenses, interest, and taxes from all the sales revenue for a specific time period. In the case of an individual, it comprises wages or salaries or other payments.read more to the partners, and they must use this information when filing their individual tax returns.

#2 – 1120-S form

S- corporations use the 1120-S form for the same purpose- to show each member of the entity how much they earned or lost for the tax year. The IRS will utilize the information detailed in the 1120-S to determine the percent ownership of an individual in an S-corporation.

#3 – 1041 Form

Lastly, beneficiaries of an estate or trust will use the 1041 form. It includes the income derived from an estate after the passing of a descendant.

Where Do You Find Schedule K-1 Forms?

The business or entity will distribute K-1 tax forms to partners or beneficiaries. The company’s accountant or the person responsible for handling the entity’s finances should be preparing the documents.

One can also find K-1 forms on the IRS website (1065, 1120-S, 1041)

How to File Schedule K-1 Forms

Even though the process is similar to filing other tax forms, it depends on the type of business and the type of tax forms used. One must pay attention to using the correct type of tax form and attach it to the personal tax return. One can submit the documents electronically or through a qualified accountant.

If someone does their own taxes, the address they should use depends on the state they reside in and the type of business they own. The address for filing the different kinds of tax forms is as follows.

  • 1065 – Partnership1120-S – S Corporation1041 – Beneficiary of a trust or estate

Schedule K-1 vs 1099 Form

Often, one mistakes the K-1 forms for the 1099 tax form. Both these forms are “information returns” as they are not the actual returns that need to be filed, but contain information that is needed to file your taxes.

However, the information recorded on these forms will differ from one another. A K-1 form is for partners, while a 1099 form is for individuals who are not employees. These individuals can include:

  • FreelancersSole proprietorsIndependent contractorsAnd self-employed individuals

One will also receive a 1099 form if they invest in equity, such as a stock that pays dividends.

This has been a guide to What is Schedule K-1. Here we discuss where do we find the schedule k-1 form along with types, reasons, and how to file. You may learn more about financing from the following articles –

Schedule K-1 is an IRS tax form that needs to be filed by shareholders, partners, and beneficiaries of a trust or estate to report each of their earnings, losses, and deductions in a tax year. All pass-through entities are required to file this tax form. These tax documents also help an entity track the contributions of individual partners towards business performance.

These tax forms can either be filed online or through an accountant. It is important to use the correct tax form to file Schedule K-1. The tax form needs to be attached with the personal tax return.

Businesses must issue schedule K-1 to individual partners by March 15. The partners and shareholders have less than one month to fill out all the information, and they can submit the forms by mid-April.

  • Sole Proprietorship vs PartnershipStakeholder vs ShareholderLLC vs Sole Proprietorship