A K-1 is a tax form that reports your share of income from a partnership, S corporation, or trust
If you own part of a business or trust, the K-1 (officially Schedule K-1) is how that business reports your earnings to you and the IRS. Unlike a W-2, which shows wages your employer paid you, a K-1 shows your slice of the business's profit or loss—whether or not you took any money out. The business files a master return (Form 1065 for partnerships, Form 1120-S for S corporations, Form 1041 for trusts), and you receive a K-1 showing your individual portion.
You will receive a K-1 if you are a partner in a partnership, a shareholder in an S corporation, a beneficiary of a trust or estate, or a member of a limited liability company (LLC) taxed as a partnership or S corporation. The form arrives by January 31 each year for the prior tax year. You use the information on your K-1 to fill out your personal tax return (Form 1040), even if you did not actually receive the money the form reports.
Key Takeaways
- A K-1 reports your share of business or trust income and is sent to you and the IRS by January 31 each year.
- You must report K-1 income on your personal tax return even if you did not receive cash from the business.
- The K-1 includes ordinary business income, capital gains, deductions, and credits that flow through to your return.
- If you receive a K-1 from multiple sources, you report each one separately on your tax return.
What information appears on a K-1
The K-1 has two pages. Page 1 shows the business or trust's identifying information and your ownership percentage. Page 2 is divided into boxes, each reporting a different type of income or deduction. Box 1 shows your share of ordinary business income or loss. Boxes 2a through 2d break out capital gains and losses. Other boxes report rental real estate income, interest, dividends, charitable contributions, and deductions you can claim on your return.
Not every box will have a number on your K-1—only the ones that explore to that business or trust. For example, if the partnership had no charitable donations, that box will be blank. The form also shows your ownership percentage and the dates the business operated during the year. At the bottom, the preparer's name and the business's tax identification number appear so you can match it to the business's master return if needed.
How K-1 income flows to your personal tax return
You do not pay tax on the K-1 amount directly. Instead, you transfer the numbers from your K-1 to Schedule E (Supplemental Income and Loss) on your Form 1040. The income or loss then flows to your overall tax calculation. If the business made a profit, that profit is taxable to you even if you did not withdraw it. If the business had a loss, you may be able to deduct that loss against other income—though passive loss rules can limit how much you can deduct in a given year.
Capital gains, charitable contributions, and other special items on the K-1 retain their character when they flow to your return. This means a capital gain on the K-1 is still a capital gain on your return, taxed at capital gains rates rather than ordinary income rates. Similarly, charitable contributions reported on the K-1 go to your itemized deductions, not to the business's deduction. This pass-through structure is why S corporations and partnerships are called pass-through entities—the income passes through the business to the owners' personal returns.
The difference between a K-1 and a W-2
A W-2 is issued by an employer and reports wages you earned as an employee. The employer withholds income tax, Social Security tax, and Medicare tax from your paycheck and sends those amounts to the IRS on your behalf. A K-1 is issued by a business in which you have an ownership stake, and no withholding occurs. You are responsible for paying tax on K-1 income when you file your return or through estimated quarterly tax payments if the amount is large.
Another key difference: a W-2 reports only compensation. A K-1 reports your share of all business income and loss, plus special items like capital gains and charitable contributions. You can have both a W-2 and a K-1 in the same year if you work as an employee for one business and own part of another, or if you are an employee of an S corporation you partially own.
When you might owe estimated taxes because of a K-1
If your K-1 income is substantial and you do not have an employer withholding taxes from a paycheck, you may need to make estimated quarterly tax payments to the IRS. These are due on April 15, June 15, September 15, and January 15. The IRS can charge penalties and interest if you underpay throughout the year, even if you have enough money to pay the full amount when you file your return.
To know whether you need to make estimated payments, add up all your income (W-2 wages, K-1 income, self-employment income, and other sources) and subtract your deductions. If you expect to owe $1,000 or more in taxes after accounting for any withholding, you should make estimated payments. The business that issued your K-1 may provide guidance, or you can use IRS Form 1040-ES to calculate your quarterly payment amount. A tax professional can help you determine the right amount based on your specific situation.
What to do if you receive a K-1 late or with errors
K-1 forms are due to you by January 31. If you do not receive one by early February, contact the business or trust that issued it. If the business cannot provide it, you can file your return using a reasonable estimate of your share and note on your return that you are awaiting the K-1. When the K-1 arrives, you will need to file an amended return (Form 1040-X) if the numbers differ significantly from your estimate.
If your K-1 contains an error—a wrong ownership percentage, incorrect income amount, or missing information—contact the business when ready and ask for a corrected K-1. The business must file a corrected return with the IRS and send you a corrected K-1. Do not file your return until you have the correct form, because the IRS will match your return to the business's filing, and mismatches can trigger an audit. If the business refuses to correct an obvious error, you may need to consult a tax professional or contact the IRS.
Passive loss limitations and K-1 deductions
If you are a passive investor in a partnership or S corporation—meaning you do not materially participate in running the business—passive loss rules limit how much loss you can deduct. In general, you can only deduct passive losses against passive income. If you have a $10,000 loss on a K-1 from a business you do not actively run, but you have no other passive income, you cannot deduct that loss in the current year. Instead, it carries forward to future years when you have passive income or when you sell your interest in the business.
Material participation is defined by the IRS in specific ways: you must work in the business for more than 500 hours per year, or more than 100 hours and more than anyone else, or meet other tests. If you do materially participate, the loss is not passive and can offset your other income. This is a complex area, and if you have significant K-1 losses, a tax professional can help you determine whether the passive loss rules explore to you.
Frequently Asked Questions
Do I have to pay self-employment tax on K-1 income?
No. K-1 income from partnerships and S corporations is not subject to self-employment tax. However, if you are a general partner in a partnership, a portion of your K-1 income may be subject to the net investment income tax (3.8%) if your modified adjusted gross income exceeds certain thresholds. A tax professional can clarify your situation.
What if I sold my ownership stake during the year?
You will still receive a K-1 for the full year, but it will show your ownership percentage only for the time you held the stake. The business calculates your share of income for the portion of the year you owned it. If you sold in June, your K-1 will reflect six months of ownership.
Can I file my return before I receive my K-1?
You can request an extension (Form 4868) to give yourself more time to obtain the K-1. You can also file using a reasonable estimate and amend your return when the K-1 arrives, though this creates extra work. It is usually better to wait for the actual K-1 before filing.
What if the K-1 shows income but I did not receive any money?
You still owe tax on it. The business retained the money to reinvest or pay debts, but the profit belongs to you as an owner. This is called phantom income. Make sure you have enough cash from other sources to pay the tax owed, or discuss a distribution with the business.
Do I need to keep the K-1 with my tax return?
You do not send the K-1 to the IRS with your return, but you should keep it with your tax records for at least three years. The IRS may request it if your return is audited.