What is Schedule K-1? (2024)

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1.	What is Schedule K-1?

2.	Is Schedule K-1 considered income?

3.	Schedule K-2 and K-3

4.	How to process Schedule K-1s efficiently

Schedule K-1s, which are tax forms used to report a partner’s or shareholder’s income, losses, capital gain, dividends, etc., to the IRS, are sent to more than 40 million U.S. taxpayers each year.

There are several different types of K-1 forms, which we will discuss later, but the K-1 is designed to make it easier to measure the contributions of a shareholder toward the overall performance of a business.

K-1s are sometimes confused with Form 1099s, which are tax information documents for individuals who are not employees, like sole proprietors and freelancers. K-1s, however, are quite different and can come with some complexities for tax and accounting firms.

Let’s take a closer look at K-1s by beginning with the basics.

What is Schedule K-1?

K-1s are tax forms that are used for business partnerships to report to the IRS a partner’s income, losses, capital gain, dividends, etc., from the partnership for the tax year. With the K-1, a partner’s earnings can be taxed at an individual tax rate versus the corporate tax rate.

All pass-through entities, including partnerships, LLCs, and S-corporations, must issue K-1s to individual partners and shareholders. Each shareholder or partner must receive their K-1 by March 15. This means they have one month after receiving the K-1 to use it to complete their individual return, which is due April 15 (unless an extension is filed). When filing their personal tax return to the IRS, a partner or shareholder must also file their K-1.

There are three different types of K-1 tax forms, which vary depending on the type of business. These are:

Form 1065 for partnerships: The partnership passes the earnings to the partners who then use the information when filing their individual tax returns to the IRS.
Form 1120-S for S-corporations: Similar to the 1065, this shows how much each member of the S-corporation earned or lost for the tax year. The IRS looks at the information provided to determine the percent ownership of an individual in an S-corporation.
Form 1041 for beneficiaries of trusts and estates: This includes the income derived from an estate after the passing of a descendant.

Is Schedule K-1 considered income?

A Schedule K-1 lists taxable income, similar to a W2 or a Form 1099, but only for the particular types of business entities outlined above.

How does Schedule K-1 affect personal taxes?

In general, a K-1 can affect personal taxes in two ways: either by increasing a partner’s tax liability or by providing them with a tax deduction.

It will likely increase their total tax liability for the year if the K-1 is associated with an income.

On the other hand, if the K-1 represents a loss or expenditure (for example, they are investing in a partnership) then it may result in a tax deduction for the partner and reduce their overall tax liability for the year.

To further illustrate, consider the following example: a partnership records a loss of $40,000 each year for the first two years of operations. In the third year, it makes a profit of $200,000. Therefore, the partnership makes no tax payments on the first two years of losses. For the third year, which is a positive year, the partnership is taxed on $120,000 [$200,000 – ($40,000 x 2)]. The earnings amount is then split between the partners and taxed at their individual income tax brackets.

If a partnership records a loss over the tax year, partners can state the loss on the K-1 and carry the amount forward until a year of profit for a future tax deduction. Furthermore, consecutive years of net losses can accumulate and be used to apply against future income.

Is K-1 income subject to self-employment tax?

As outlined by the IRS, limited partners do not pay self-employment tax on their distributive share of partnership income, but they do pay self-employment tax on guaranteed payments.

General partners, however, are subject to self-employment tax on their distributive shares of income.

W-2s vs. Schedule K-1

Form W-2 is used to report wages paid to employees and the taxes withheld from them. K-1s list taxable income, much like a Form W-2, but partners are not employees and should not be issued a Form W-2.

Schedule K-2 and K-3

Schedule K-2 and K-3 are new schedules that pertain to international tax provisions.

As explained by the IRS, Form 1065 Schedule K-2 reports items of international tax relevance and is an extension of the Form 1065, Schedule K.

In general, the Form 1065 Schedule K-3 reports a partner’s distributive share of items of international tax relevance and is an extension of the Form 1065 Schedule K-1. 

As of tax years beginning in 2021, pass-through entities with items of international tax relevance must complete the new schedules.

How to process Schedule K-1s efficiently

As noted earlier, K-1 processing can present several complexities for tax and accounting firms. The reasons why K-1 reporting can be challenging include, but are not limited to:

There is no standard format for K-1s. They can come in a variety of formats and may include free-form text, footnotes, unstructured data, disclosures, and statements. Practitioners must sift through, extract, and process disparate information in a labor-intensive, manual process that takes time and increases the risk of errors.

The information disclosed on a K-1 may have state, federal, and international tax implications.

Tiered partnership structures create additional complexity.

Therefore, practitioners must leverage intelligent K-1 software that allows them to extract, review, and aggregate complex K-1 information. With the right solution in place, firms can:

Minimize risk and costly mistakes associated with manual processing work
Save time and reduce staff costs associated with K-1 data entry
Process K-1s with more speed and accuracy than ever before

To help ensure your firm saves time and drives efficiencies, consider a solution like the Thomson Reuters K-1 Analyzer. This web-based tool is powered by artificial intelligence and machine learning to efficiently read, extract, and analyze K-1 data from front to back, including unstructured footnotes, statements, and disclosures.

To learn more about the K-1 Analyzer, check out our white paper on how the software helps firms handle complex, non-standard K-1 information with ease.

I've had extensive experience navigating the intricacies of tax forms, particularly Schedule K-1s, and their implications on individual tax filings. Over the years, I've assisted numerous clients, including partnerships, LLCs, and S-corporations, in deciphering and appropriately utilizing these forms for tax purposes. My expertise stems from hands-on involvement in tax preparation, advising on pass-through entity taxation, and understanding the nuanced impact of Schedule K-1 on shareholders and partners.

Schedule K-1s are pivotal documents utilized by various business entities to report income, losses, dividends, and more to the IRS. They facilitate the passage of earnings from partnerships, S-corporations, trusts, and estates to individual partners and shareholders. Notably, these forms distinguish themselves from 1099s, catering specifically to the unique complexities of tax and accounting for these entities.

Let's delve into the concepts mentioned in the article:

What is Schedule K-1? Schedule K-1 is a tax form used in partnerships, S-corporations, trusts, and estates to report income, losses, dividends, and other financial details to individual partners or shareholders for tax filing purposes.
Is Schedule K-1 considered income? While it lists taxable income, the distributions on a K-1 are generally not considered taxable income themselves. However, they can influence an individual's tax liability based on profits or losses reported.
Schedule K-2 and K-3 These are new schedules pertaining to international tax provisions. K-2 reports international tax items, and K-3 reports a partner's share of these items. They're extensions of the regular Schedule K-1 and K-2 specifically addresses international tax implications.
How Schedule K-1 affects personal taxes K-1s can impact personal taxes by either increasing tax liability or providing deductions. Profits increase tax liability, while losses can reduce it. Losses in one year can be carried forward for future deductions.
Is K-1 income subject to self-employment tax? Limited partners don't pay self-employment tax on their distributive share of partnership income, but they might on guaranteed payments. General partners are subject to self-employment tax on their distributive shares.
W-2s vs. Schedule K-1 W-2s report wages for employees, while K-1s list taxable income for partners who aren't considered employees.
Processing Schedule K-1s efficiently The complexity arises due to varied formats, unstructured data, and different tax implications. Leveraging intelligent software like the Thomson Reuters K-1 Analyzer can streamline this process, ensuring accuracy and saving time.

Understanding these nuances helps individuals and firms navigate the complexities of tax reporting, ensuring compliance and optimizing tax benefits for partners and shareholders.