The S corp Schedule K-1 is a form that is filed by S corporations to report the share of income, deductions, losses, and credits for each shareholder. The shareholders then use the Schedule K-1 to report these financial transactions on their individual tax returns.

What is a Schedule K-1 Tax Form?

The tax code of the United States permits various types of entities to use pass-through taxation. The main advantage of pass-through taxation is that it shifts the liability for income tax from the business entity to the individuals who have beneficial interests in the business entity.

Both S corporations and partnerships are considered pass-through entities. A pass-through entity usually doesn't have to pay income tax. Rather, the business income is distributed to the shareholders or partners. The shareholders and partners then file personal tax returns and pay taxes on the income.

Therefore, every tax season, partnerships are required to file Form 1065. Part of  this form involves filling out and distributing the Schedule K-1s to each partner or shareholder.

The Schedule K-1 reports the amount of income that is passed through to each shareholder or owner who has an interest in the business entity. The Schedule K-1 is utilized to report shareholder and individual partner shares of income for an S corporation or partnership.

K-1 items are transferred to the personal tax return of the shareholder or individual partner. The Schedule K-1 is used to report losses, income, capital gains of partners, and dividend receipts. The Schedule K-1 is also used to report the capital gains of shareholders for S corporations and certain trusts.

The partnership Schedule K-1 is also used to show the income is distributed among the members in an LLC that has multiple members. Such LLCs are taxed as partnerships.

For example, if you own 50 percent of an S corporation and the S corporation has a net profit of about $200,000, you will receive a Schedule K-1 that indicates you have been allocated $100,000 from the S corporation.

The distribution will be included on the individual tax return. However, the distribution will not be subject to any self-employment taxes. Conversely, the net profit of an individual sole proprietorship is subject to self-employment taxes.

Another advantage is that S corporations don't need to pay any federal income taxes. This is because all of the profit is allocated to the shareholders. Therefore, the net profit is taxed on an individual, rather than corporate, level.

The Schedule K-1 differs depending on whether it came from an S corporation, trust, or partnership. However, Schedule K-1s of all types provide information about deductions, types of income, and losses. This is to ensure the recipient will be able to accurately report all of this information on his or her individual tax return.

An S corporation need to fill out the Form 1120S to file annual tax returns just like partnerships. Every shareholder in the corporation receives a Schedule K-1 after the Form 1120S is filed.

The shareholders report all of the information on the K-1 to report the allocated income on their separate tax returns.

How Does Schedule K-1 Work With a Business Tax Return?

The business type has an impact on the way in which a business is taxed. Partnerships aren't taxed on income. Rather, the individual partners are responsible for paying taxes on the income they receive from partnerships.

However, the partnership is responsible for filing the Form 1065, which is the information-only tax return. S corporations, on the other hand, file the 1120S corporate return.

While individual owners and members of an LLC with multiple members will receive the Schedule K-1 and will have to pay taxes on income that they receive, the owner of a single-member LLC will not get Schedule K-1s. This is because LLCs with just one member are taxed like sole proprietorships.

How Do Schedule K-1s Differ for Partners and S Corp Owners?

There are two different versions of the Schedule K-1:

  • Form 1065, K-1 - This version is for the partners of a partnership
  • Form 1120S, K-1 - This version is for the shareholders of an S corporation

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