Incur Profit or Loss
A Schedule K-1 serves the same function as a W-2 for people who are receiving income in a way other than through a regular paycheck. For example, a partner in a partnership, limited liability corporation (LLC) or S-corporation might receive a Schedule K-1 to report his gain or loss experienced throughout the year. A Schedule K-1 might also report income from a trust.
Provide Necessary Information
The person filling out the Schedule K-1 will need your name, address and identifying number (typically your Social Security Number). For partnerships and corporations, the person filling out the Schedule K-1 will also need to know what percentage of the gain or loss to assign to you. The amounts reported on the Schedule K-1 and attached to another tax form (such as the Form 1065) should add up to the total amount declared on the main tax form.
Attach to Another Tax Form
The Schedule K-1 reports the profits or loss that an individual should declare on his or her personal income tax return. For example, an LLC is required to file a Form 1065 that reports the net gain or loss of the LLC. The amount reported on the 1065 is divided among the partners and reported on a Schedule K-1 for each partner. Schedule K-1's are attached to the Form 1065 and copies are distributed to each partner.
Ensure Receipt Before Filing Personal Taxes
Unlike W-2s, the entity issuing the Schedule K-1 does not have to meet a deadline to mail out the Schedule K-1. For this reason, it is very important for someone who anticipates receiving a Schedule K-1 to make sure that he receives the document before he files his personal taxes. He is liable for any tax amount due on gains reported on the Schedule K-1, even if he filed his personal income tax form before receiving the Schedule K-1.
Include in Personal Income Taxes
The person who receives a Schedule K-1, such as a partner in an LLC, is required to report the amount shown on the Schedule K-1 on his personal tax form. He will then either pay taxes on the gain or reduce his declared earnings by the loss, depending upon which applies for the tax year.