If you structure your business as a partnership or S Corporation, there is one form you need to learn like the back of your hand. And, you need to make sure your partners know the form, too. That oh-so-important form is Schedule K-1. So, what is Schedule K, and what does it do? Let’s take a closer look at the FAQs as listed below:
1. What is IRS Schedule K-1?
2. Who gets an IRS Schedule K-1?
3. What to do with a K-1 tax form?
4. When should I receive my IRS Schedule K-1?
6. Do you have to file an IRS Schedule K-1?
7. Is IRS Schedule K-1 income considered earned income?
8. How to fill out IRS Form Schedule K-1?
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Q1: What is IRS Schedule K-1?
Schedule K-1 is an Internal Revenue Service (IRS) tax form that's issued annually. It reports the gains, losses, interest, dividends, earnings, and other distributions from certain investments or business entities for the previous tax year. These are usually pass-through entities that don't pay corporate tax themselves, because they directly pass profits on to their stakeholders or investors. Participants in these investments or enterprises use the figures on the K-1 to compute their income, and the tax due on it.
Q2: Who gets an IRS Schedule K-1?
Among those likely to receive a Schedule K-1 are:
S corporation shareholders
Partners in limited liability corporations (LLCs), limited liability partnerships (LLPs), or other business partnerships
Investors in limited partnerships (LPs) or master limited partnerships (MLPs)
Trust or estate beneficiaries
Q3: What to do with a K-1 tax form?
If you received a K-1 tax form from a fiduciary, you should use it to help calculate your taxable estate or trust income on Form 1040. A copy of the K-1 tax form should be sent along with your return if your backup withholding is reported on Box 13, Code B.
The fiduciary will file a copy of the form. Keep a copy of the K-1 tax form if the IRS happens to have questions about the income reported.
Q4: When should I receive my IRS Schedule K-1?
Schedule K-1 forms are notorious for arriving late. The IRS says they are due by March 15 (or the 15th day of the third month after the entity's tax year ends), but whether that means they need just to be issued by then, or to actually be in taxpayers' hands by then, seems open to interpretation. Most authorities agree you should receive one by March 15, or the closest business day to that, though.
Q5: When is Schedule K-1 due?
Individuals must file their tax returns by April 15 of each year for the prior tax year. File Schedule K-1 with your Form 1040. So, Schedule K-1 is due to the IRS no later than April 15.
Because Schedule K is due by April 15 each year, businesses must distribute the form to applicable individuals no later than March 15. Why March 15? Well, Forms 1065 and 1120S are due by March 15 each year. Without Forms 1065 or 1120S, individuals cannot receive Schedule K-1.
Businesses may file a six-month extension for filing the 1065 tax form using Form 7004. But, the business must still provide a Schedule K-1 to all applicable individuals no later than March 15.
Q6: Do you have to file an IRS Schedule K-1?
Yes, you do, if you are a general partner in a limited partnership or owner of a pass-through business entity or S corporation. The K-1 must be filed with your tax return.
For limited partners and trust or estate beneficiaries, actually filling the K-1 along with Form 1040 is usually not necessary (though the data on it must be reported on the return and figured into the calculation of taxable income and income tax owed).
Q7: Is IRS Schedule K-1 income considered earned income?
It varies, depending on the individual's participation and status. For trust and estate beneficiaries, limited partners, and passive investors, Schedule K-1 income is more akin to unearned income. For general partners and active owners in a business or pass-through business entity, the income can be considered earned income, and they may owe self-employment tax on it.
Q8: How to fill out IRS Form Schedule K-1?
The Schedule K-1 form is, thankfully, a 1-pager, so it’s pretty simple and straightforward. However, it does have some long sections that ask for somewhat detailed information.
Make sure to at least review a copy of the IRS official Schedule K-1 form to get an idea of the kind of information you should be tracking/need to gather from throughout the year to make tax time that much easier.
Part I: Information about partnership
First, start by filling in basic information about the partnership. Nothing crazy, you’ll just need your EIN number if you don’t already have it.
Also, don’t forget to check off section D if you’re publicly traded.
Part II: Information about the partner
Next, it’s time to fill in information about the partner. After some general information, you’ll want to notate what type of partner they are, including:
General or Limited partner
Domestic or Foreign partner
If you’re a disregarded entity
What type of entity they are
You’ll then fill out their share of profit/losses, a short capital account analysis, along with a few other details.
Part III: Partner’s share of current year income, deductions, credits, and other items
Part 3 is the real bulk of the Schedule K-1 form and it’s a pretty detailed breakdown of a partner’s share of the financials, including their:
Fill out each line and make sure they’re as accurate as possible
As you’re doing this, make sure you have records of some kind such as reports to back up each of these pieces of information, whether they’re bank records, income reports, or profit/loss.
Schedule K-1 may seem like a simple tax form, but if you’ve just started your partnership, you need to take it seriously. Make sure you’re tracking your profit and loss numbers with reports as well as partner income, deductions, and credits.
That way, when tax time comes around, it’s not a huge source of stress but a small routine task you can get out of the way quickly and easily. Free download the IRS Schedule K-1 Tax form (Form 1041, Form 1065, Form 1120S, Form 8865) and fill it out with PDF Reader Pro - one of the best PDF editors and form fillers, to report your taxes in due course!