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Schedule K-1 Tax Form: What Is It and Who Needs to Know?

Billie Anne Grigg

Billie Anne Grigg

Billie Anne Grigg has been a bookkeeper since before the turn of the century (yes, this one). She is a QuickBooks Online ProAdvisor, Xero Certified Advisor, LivePlan Expert Advisor, FreshBooks Certified Beancounter, and a Mastery Level Certified Profit First Professional. Billie Anne started Pocket Protector Bookkeeping in 2012 to provide an excellent virtual bookkeeping and managerial accounting solution for small businesses that cannot yet justify employing a full-time, in-house bookkeeping staff.
Billie Anne Grigg

If your business is a newly formed S-corp or partnership, you might be surprised to learn your tax return contains some unfamiliar new forms. Among these is the Schedule K-1 tax form. Many small business owners, especially those who have either never owned a business or have only owned a sole proprietorship, are confused by this tax form.

So, what is a Schedule K-1 tax form? How is it used? How is it different from other tax forms? Should you inspect it for accuracy, and—if so—what should you be looking for during your inspection?

Let’s look at each of these questions in turn, so we may become more familiar with the Schedule K-1 tax form.

What is a Schedule K-1 tax form?

To answer this question, first, we must delve into the types of businesses in which the Schedule K-1 tax form comes into play.

schedule-k-1-tax-form

There are certain types of business entities that are considered “pass-through” entities for tax purposes. If your business is a partnership or an S-corp, it is considered to be a pass-through entity.

A pass-through entity shifts the tax responsibility from the business itself to the owners or shareholders in the business. Depending on a variety of factors, this can be more beneficial than having the business itself pay the taxes on income earned by the business (as is the case for C-corporations) or having the income taxed as self-employment income (as is the case for sole proprietorships).

The Schedule K-1 tax form is the mechanism by which each partner’s or shareholder’s portion of the income and losses in a pass-through entity is reported. This form is then used by the partners’ or shareholders’ tax preparers to compile the appropriate tax form for their clients. Schedule K-1 divides certain aspects of a partnership’s or S-corp’s business activity according to each partner’s or shareholder’s basis in the business.

How is the Schedule K-1 tax form used?

As mentioned above, the Schedule K-1 tax form is the document used to report each partner’s or shareholder’s share of the income and losses in a pass-through entity business. However, income and losses are not the only things reported on the K-1.

  • In the case of a partnership where one or more partners receive guaranteed payments, the guaranteed payments are reported on the partners’ K-1s.
  • Dividends, deductions, gains, and losses are reported on each partner’s or shareholder’s K-1. These are calculated based on each partner’s or shareholder’s basis—or percentage of ownership or investment—in the business.
  • A capital account analysis for each partner, or percentage of stock ownership for each shareholder, is included on the K-1.
  • The Schedule K-1 tax form is not only used for partnerships and S-corps. You may receive a Schedule K-1 if you are the beneficiary of an estate or trust, too.

How is the Schedule K-1 tax form different from other tax forms?

The Schedule K-1 tax form is used for both reporting and reconciliation. It contains important information about each partner’s or shareholder’s income and deductions, but it also includes information about percentage of ownership in the pass-through entity. This makes Schedule K-1 more of an information return than the tax forms with which most small business owners are familiar.

As is the case with a 1099, you will not file your Schedule K-1 with your tax returns, though you will need to give it to your tax preparer so they can properly complete your tax return. File your Schedule K-1 tax form with your other important financial records. The partnership or corporation will file a copy of each partner’s or shareholder’s Schedule K-1 with either Form 1065 (for a partnership) or Form 1120S (for an S-corp.)

Should you inspect your Schedule K-1 tax form for accuracy?

The short answer to this question is, yes, you should. Your Schedule K-1 tax form contains information not only about your income and losses in your partnership or S-corp, but also about your ownership, or basis, in the business.

At the most basic level, you should check your Schedule K-1 and make sure that the correct amount of income is reported on it. After all, this document will be used to prepare your tax return, and you want to make sure you are reporting the correct amount of income and deductions.

If you received guaranteed payments from a partnership, double-check the amount reported on your Schedule K-1 and compare it with your personal records. If the amounts are off, ask for an explanation or a corrected K-1.

Since the Schedule K-1 tax form also contains information about each partner’s or shareholder’s ownership of the business, it’s important to verify this section of the form for accuracy as well. If the ownership percentages don’t look correct, ask the person who completed the K-1 to explain their calculations.

schedule-k-1-tax-form

Make sure the right Schedule K-1 has been used for your situation. There are different versions of the Schedule K-1 tax form for partners in a partnership, shareholders in an S-corp, and beneficiaries of an estate or trust. If you are a partner in a partnership, your Schedule K-1 should reference Form 1065 on the form. For S-corps, Form 1120S will be referenced. If you received money from an estate or trust, look for a reference to Form 1041.

Finally, some states have a K-1 or similar equivalent that must be provided to affected taxpayers in that state. Your tax professional can tell you if this applies to your situation.

What else do you need to know about Schedule K-1?

  • It can be complicated: The Schedule K-1 tax form looks complicated, and it can be. However, don’t be surprised if you receive a Schedule K-1 with only a few of the fields completed. This doesn’t mean there is a problem with your Schedule K-1. The form is meant to encompass a variety of situations, and not all situations apply to all businesses or partners or shareholders within that business.
  • When it’s necessary: You should expect a Schedule K-1 for every year you are a partner or shareholder in a business organized as a pass-through entity. This applies even if the business has operated at a loss for the year. A Schedule K-1 that shows a loss may improve your tax situation, so don’t disregard a K-1 that shows negative numbers!
  • When it’s due: Schedule K-1s must be prepared and made available by March 15th each year. If you are eager to file your tax return early, it can be tempting to file before you receive your K-1. Doing this, though, will likely result in you needing to amend your tax return, which typically means you will pay additional tax preparation fees. It’s best to wait to file your income tax return until you are sure you have received all the Schedule K-1s you are expecting.
  • A final warning: Avoid the temptation to not include your Schedule K-1 with your tax preparation paperwork. Like other information returns, Schedule K-1 is reported to the IRS. Failure to include the income reported on your Schedule K-1 will likely lead to an adjustment to your return by the IRS, and it can also lead to fines and penalties.

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The Schedule K-1 tax form is one of the most important documents that partners or shareholders receive each year. It can also be one of the most confusing. Take the time to review your Schedule K-1 with your tax professional.

Verifying the information on it is correct will ensure that your personal tax return is completed accurately and that you are reporting all the income—and claiming all the deductions—you should report.

This will make tax season less stressful for both you and your tax preparer, a win-win for both of you!

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.
Billie Anne Grigg

Billie Anne Grigg

Billie Anne Grigg has been a bookkeeper since before the turn of the century (yes, this one). She is a QuickBooks Online ProAdvisor, Xero Certified Advisor, LivePlan Expert Advisor, FreshBooks Certified Beancounter, and a Mastery Level Certified Profit First Professional. Billie Anne started Pocket Protector Bookkeeping in 2012 to provide an excellent virtual bookkeeping and managerial accounting solution for small businesses that cannot yet justify employing a full-time, in-house bookkeeping staff.
Billie Anne Grigg

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