The old adage tells us that there is strength in numbers. To this end, laborers organize into unions, farmers form co-operatives, political activists congregate into parties and entrepreneurs join partnerships. This last arrangement is particularly noteworthy because not all partnerships are created equal, while many of them are forged, severed and forged again.
Partnerships could be two dentists joining forces or a larger pool of associates involved in manufacturing or marketing. Important to remember is that partners can invest proportionately, meaning that some will reap more of the profits, and losses, than others. The K-1 tax form is a representation to the government assessing each partner's earnings and losses, deductions and credits.
Video of the Day
Consider also: Can an IRA Be a Partner in a Partnership?
Elements of the K-1 Form
Those receiving a K-1 do well to accurately enter its components. Part 1 contains general information about the partnership itself: tax ID number, name, address, affiliated Internal Revenue Service center as well as whether or not the partnership is publicly traded. Part 2, on the other hand, zeroes in on the individual partner.
Of special interest here is the recipient's partnership status and the percentage of profits, losses and capital specific to that individual. In turn, Part 3 focuses on the corresponding dollar values of the same.
What Entities Get a K-1?
The K-1 is a statement made by individual partners, not the partnership as a whole. In fact, most partnerships, and S corporations of under 100 shareholders, are rarely taxed on income since profits and losses pass through to each partner/stockholder. So, participants in partnerships, owners of many S corporations and members of limited liability companies are each responsible for including the K-1 schedule with their individual returns.
What If a 1099 Applies?
The IRS Form 1099 differs from the K-1 in that it documents income from a business that is neither the taxpayer's employer nor an entity in which the taxpayer has an ownership interest. Very often, a 1099 form applies to a self-employed person who has a vendor relationship with another business.
In this case, the entrepreneur is paid for services rendered, with nothing deducted for taxes, health care and other holdbacks often afforded an employee by the employer. In essence, the 1099 worker is selling a service to a customer, and the form reflects the client's remittance.
What is a K-1 form for tax purposes? It reflects a partner's share in business performance.
Consider also: How Does a 1099 Form Work?
Must a Partnership File a Return?
Noted above is the fact that most partnerships themselves do not pay income tax. Yet they are still mandated to file a return (Form 1065) with the IRS. Why? This is an information return to which IRS analysts may refer when examining the returns of individual partners.
Should the numbers on the partnership's return fail to jibe with each of the partner's information, this may be cause for further investigation. To be sure, there is widespread confusion among the public that having no tax liability is tantamount to having no responsibility to file.
Are There Other Partnership Documents?
Partnerships that retain staff are supposed to file a quarterly Form 941 that reports what is being held back from paychecks, such as income tax, Social Security and Medicare. If the partnership is involved with the manufacturing, distribution or importing of goods, there are excise tax forms that apply as well.
Myriad other documents relate to unemployment insurance, farm income and business expenses. Partners should consult with their accountants and tax professionals to determine exactly which forms apply to them. A partner, nevertheless, must always submit a Schedule K-1.