What is Schedule K-1?

How it works

Schedule K-1 is the pass-through entity's report card. A US partnership (Form 1065) or S corporation (Form 1120-S) computes its total income, deductions, and credits — then allocates each item to the owners on a Schedule K-1. The owners use those numbers to file their personal returns.

Two flavours of K-1, same purpose:

The K-1's purpose is information: the partnership itself owes no tax (pass-through), but each partner / shareholder owes tax on their allocated share. The IRS cross-checks each K-1 it received from the entity against the income reported on each owner's return.

What K-1 looks like

Box 1: ordinary business income / loss. Box 2: net rental real-estate income. Box 3: other rental income. Box 4: guaranteed payments (partnerships). Boxes 5-9: interest, dividends, capital gains. Box 13-20: deductions, credits, alternative minimum tax items, foreign transactions, foreign tax paid (relevant for foreign tax credit claims by US owners).

For non-resident partners specifically, the K-1 also includes any §1446 withholding the partnership applied to ECI flowing to the foreign partner — withholding at the top US tax rate (37% for individual partners in 2024, 21% for corporate partners) on the foreign partner's share of ECI, paid to the IRS quarterly.

Examples

• US co-founder of a multi-member Delaware LLC. The LLC is a partnership for federal tax. Files Form 1065, issues a K-1 to each co-founder showing each one's 50% share of $200,000 net income = $100,000. Each co-founder reports $100,000 on Schedule E of Form 1040 and pays self-employment tax on the operating portion.
• French resident as a 25% partner in a US partnership running a Manhattan restaurant. The partnership has US trade or business → 25% share of net = ECI for the French partner. The partnership withholds §1446 tax at 37% on the ECI quarterly. K-1 reports both the share of income and the §1446 withholding. The partner files Form 1040-NR claiming the §1446 withholding as a credit; usually ends up with a refund after deductions.

Common mistakes

• Filing your 1040 / 1040-NR before the K-1 arrives. Partnerships routinely deliver K-1s in September after extension. Missing or estimating the K-1 means amending later.
• Ignoring §1446 withholding for foreign partners. Some partnerships forget to apply it; the IRS holds the partnership liable for the missed withholding plus penalties. Foreign partners receiving K-1s should verify §1446 was withheld and is reported.
• Treating distributions as the taxable amount. Tax follows the K-1 allocation, not the cash. A partner can owe tax on $100,000 of allocated income while only receiving $20,000 in cash distributions.
• Confusing K-1 with 1099. 1099 is for non-employee compensation paid to a contractor (US-person recipient). K-1 is for partner / shareholder allocations from a pass-through entity. Different forms, different mechanics, never interchangeable.