When setting up a business, the structure of ownership not only has operational implications but also financial ones. It determines how much of the earnings you’re entitled to and, once included in your total income, how much you’re personally responsible for in taxes. Money earned from owning a business is to be included in the owner’s income and taxed accordingly.
Pass-through taxation moves the tax liability of a company to the individuals or other entities that have a beneficial interest in it. This means that rather than have the company responsible for taxes, the owners are. This amount of income, losses, deductions, and credits for a given owner is outlined on Schedule K-1. The owners must then include this information when filing their personal tax returns.
Schedule K-1 can be attached to several different types of tax returns, depending on how the company is set up. The K-1 tax form varies slightly based on whether the ownership structure is a partnership, S corporation, or a trust or estate.
For businesses owned by a partnership, each partner is responsible for reporting their individual share. Any income, losses, deductions or credits that the business reports on informational Form 1065 must be accompanied by a Schedule K-1 form, outlining each partner’s portion of that responsibility. This is sent to the IRS, as well as each of the owners.
The owners are then to include this information on their individual tax returns.
Although S corporations file their taxes using Form 1120S, the Schedule K-1 for this form operates almost the same as with partnerships. The main difference is that instead of the partners receiving them, the shareholders do. Schedule K-1s identify a particular shareholder’s income, losses, deductions and credits, which they are then expected to include when filing their personal tax returns.
Trusts and Estates
Whether a trust or estate pays income tax on their earnings or passes that responsibility on to a beneficiary, it varies from case to case. Some trusts pay these taxes themselves on Form 1041, and others are structured to pass that responsibility on to a beneficiary. If it is passed on, the responsible beneficiaries will receive this Schedule K-1.
When this happens, the trust or estate reports a deduction of the same amount on Form 1041 to avoid being taxed for it twice. The beneficiary then includes the information on Schedule K-1 as income when filing their own personal tax returns.
How TaxSlayer can help
The most important thing to remember when you receive a Schedule K-1 is that it must be included in your income on your tax return. While there are many variations of Schedule K-1, they all represent the same thing: the amount of income, losses, deductions, and credits you have for your portion of ownership in that business.
By filing your tax return with TaxSlayer, we cover all the bases to make sure that you account for all your income, including information outlined on your Schedule K-1.