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How Do I Account for Self-Employment Taxes on Schedule K1 Income?

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Schedule K1 is provided on IRS Form 1065 for taxpayers to report self-employment taxes related to a business partnership. Schedule K1 assists business partners in reporting their share of the profits, losses, deductions, and credits.

Partnerships need to file IRS Form 1065 and Schedule K1 for tax purposes. Partnerships are considered “pass-through” entities, which means the profits and losses of the business are not taxed independently, but rather to its owners. 

You must account for self-employment taxes correctly on a Schedule K1 to keep you and your partnership in good standing with the IRS.

Understanding a Schedule K1

Schedule K1 is part of IRS Form 1065. Form 1065 is used by the IRS to determine the overall profits and losses of the business partnerships. Meanwhile, every member of the partnership files his or her Schedule K1.

As a result, your Schedule K1 is the best way to determine how much of the tax burden you owe related to the partnership.

You must include a Schedule K1 with Form 1040 because the IRS will not accept a partial Form 1040. If you do, the IRS will consider the return incomplete and is just as bad as not filing a tax return altogether.

The following types of business entities need to file Form 1040 with an attached Schedule K1:

●     General Partnership

●     Limited Partnership

●     Limited Liability Partnership

●     LLC (elected to get taxed as a partnership)

Every tax year, an eligible business partnership must submit 1) IRS Form 1040, and 2) attach the appropriate amount of Schedule K1s depending on how many partners are involved with the business (one Schedule K1 per partner).

K1 Distributions Vary Based on Partnership Guidelines

It is important to remember that every IRS Form 1040 and attached Schedule K1 documents are different from one entity to the next.

The profits of a partnership are distributed according to the details outlined in the partnership agreement. Therefore, the partnership has control over how it distributes its earnings.

For example, some partnerships may bring in a lot of profits, yet also elect to reinvest much of those earnings back into the business. Consequently, the Schedule K1 will not contain any income. Ultimately, it comes down to the discretion of the partners involved in the business.

Schedule K1 and Self-Employment Taxes

The reason why a Schedule K1 is important for income tax is it shows your earnings from a partnership or LLC and what amount of self-employment tax is required based on the earnings.

The earnings on a Schedule K1 are traditionally dictated by the amount disclosed on individual Form 1099s. Any other organization that did business with your partnership and you earned more than $600 from during the tax year is required to send you a Form 1099.

It is not uncommon for self-employed individuals working as part of a partnership to receive multiple 1099s. Once you add the income from each 1099, you can come up with a total income for the tax year. It will subsequently help you file a Schedule K1 and pay the appropriate amount of self-employment taxes.

The general rule is the Schedule K1 is relevant to individuals in a partnership and helps determine your self-employment tax. Meanwhile, Form 1099 is relevant to the business partnership as a whole.

Protect Your Partnership with a Tax Professional

Levy & Associates has decades of experience working with self-employed individuals through several different types of entities. We have assisted countless partnerships in documenting Form 1060 and Schedule K1 to file correctly.

Contact Levy & Associates today to schedule an initial free consultation. We are available at 800-TAX-LEVY or visit www.levytaxhelp.com.

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