If you're a shareholder of an S corporation or a partner in a partnership, you may receive a Schedule K-1 form, which is similar to a 1099 form. A K-1 form is designed to help the shareholder or partner file their personal income returns. The manner in which K-1 income is taxed largely depends on the amount of money you receive. When you start preparing your tax return, you should know how to input the K-1 income information.
What Is K-1 Income?
If you're a partner in a business or a financial entity, or a shareholder in an S corporation, you should receive a Schedule K-1 document from the business or entity that you're associated with. If one of these documents is sent to you, make sure that you use it to report your losses, dividends and earnings. Most financial entities and businesses don't pay corporate taxes directly. Instead, the tax liability shifts to stakeholders.
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If you've been wondering what K-1 income is, it represents your share of a company's or partnership's losses, earnings, credits and deductions. While standard employees for a company usually receive Form 1099 to help them prepare their tax returns, you will receive a K-1 form, which contains most of the same information.
What Is the K-1 Income Tax Rate?
The exact amount of tax that you owe as a result of earning K-1 income depends on your tax bracket for the year. Let's say that you earn $30,000 in pass-through income from another business or entity. You would then add this income to any other income you bring in to calculate the amount of taxes you owe.
If you make an additional $50,000 in standard income, the total amount of income that would be taxed is $80,000. For 2021, any income between $40,526 and $86,375 is taxed at a rate of 22 percent for a single filer.
How Is K-1 Income Taxed?
As mentioned, K-1 income is taxed just like the rest of your income. However, there are some special guidelines that can help you reduce the amount of taxable income you have. When the Tax Cuts and Jobs Act was passed in 2017, owners and stakeholders in businesses were provided with a pass-through allowance that permits these individuals to deduct up to a total of 20 percent from their net business income when filing an individual tax return. For example, if you earned $100,000 in pass-through income for the year, the pass-through allowance would allow you to reduce your taxable income to $80,000.
To know how to read the information on your K-1 tax form, first identify which tax form you've been given. For instance, partnerships are required by law to provide the Form 1065 Schedule K-1 to any partners in the company. Any loss or income from this partnership will be passed to you and other partners, which is when it can be added to your total income as you fill out Form 1040.
If you are a shareholder in an S corporation, you will be sent the Form 1120S Schedule K-1, which is where loss or profit is reported. Your number of shares will be displayed on this document alongside an extensive amount of other information about your stake in the company. Trusts and estates are also required to send Schedule K-1 Form 1041, which includes information about any credits, income or deductions that beneficiaries have received for the year.
Schedule K-1 is an essential document that contains all of the information needed to complete an annual tax return. If you're having difficulty filling out the necessary information, you can find instructions on how to do so on the second page of the document.