The Schedule K-1 does not carry its own tax rate. The income shown on it flows onto your Form 1040 and is taxed at whichever rate applies to that type of income on your personal return: ordinary federal brackets from 10% to 37% for regular business income, preferential 0%, 15%, or 20% rates for long-term capital gains and qualified dividends, and in some cases an added 15.3% self-employment tax or a 3.8% surtax on passive income. So the K-1 tax rate you actually pay depends on what kind of income the entity passed through to you and how much other income you have for the year.
Partnerships, S corporations, trusts, and estates are pass-through entities. The entity itself does not pay federal income tax; it files an information return and hands each owner or beneficiary a K-1 breaking out their share of the year’s income by category.1Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) You owe tax on that share whether or not any cash was distributed to you, which catches many first-year partners by surprise. Each box on the K-1 lands in a different place on your return because each type of income follows its own set of rules.
Ordinary Business Income: The Regular Brackets
Ordinary business income from Box 1 of a partnership or S corporation K-1 is added to your wages, interest, and other regular income and taxed at the standard federal brackets. For 2026, the seven brackets for single filers are:2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- 10% up to $12,400
- 12% from $12,401 to $50,400
- 22% from $50,401 to $105,700
- 24% from $105,701 to $201,775
- 32% from $201,776 to $256,225
- 35% from $256,226 to $640,600
- 37% above $640,600
Married couples filing jointly get roughly double-wide bands, with the 37% rate starting above $768,700.2Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The brackets are progressive, so only the income falling inside each band is taxed at that band’s rate. If your K-1 pushes your taxable income from $90,000 to $130,000, only the slice above $105,700 is taxed at 24%.
Capital Gains and Qualified Dividends
Long-term capital gains and qualified dividends reported on your K-1 keep their preferential treatment when they hit your return. The rate is 0%, 15%, or 20% depending on your total taxable income. For 2026, single filers cross from 0% to 15% around $49,450 and from 15% to 20% around $545,500; the joint thresholds are roughly $98,900 and $613,700.3Internal Revenue Service. Revenue Procedure 2025-32
The gap matters. An investor whose ordinary income sits in the 35% bracket pays only 15% on long-term gains passed through on a K-1. Short-term gains, from assets the entity held a year or less, do not qualify and are taxed at your ordinary rate. Your K-1 will separate the two.
Self-Employment Tax on Partnership Income
If you are a general partner or otherwise actively participate in a partnership’s trade or business, your share of the earnings is generally subject to self-employment tax on top of income tax. The self-employment rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare.4Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes) The Social Security portion applies only to the first $184,500 of combined wages and self-employment income in 2026.5Social Security Administration. Contribution and Benefit Base The Medicare portion has no cap.
This obligation appears in Box 14 of a partnership K-1 and is calculated on Schedule SE. You can deduct the employer-equivalent half (7.65%) when figuring adjusted gross income, which softens it somewhat. Failing to plan for the 15.3% is one of the most common mistakes new partners make, particularly those coming from W-2 jobs where the employer covered half.
S Corporation Shareholders Are Taxed Differently
S corporation shareholders who work in the business do not pay self-employment tax on their K-1 income. The corporation is required to pay them reasonable wages for their services and withhold payroll taxes on those wages; income passing through on the K-1 after wages have been paid is generally not subject to self-employment tax.6Internal Revenue Service. Wage Compensation for S Corporation Officers The IRS scrutinizes shareholders who set salaries artificially low to shift more income to the K-1 side.
Additional Medicare Tax and the Net Investment Income Tax
Two surtaxes sit on top of the rates above for higher earners, and both matter to K-1 recipients.
The Additional Medicare Tax is 0.9% on self-employment income above $200,000 for single filers or $250,000 for joint filers.7Internal Revenue Service. Questions and Answers for the Additional Medicare Tax The threshold combines Medicare wages from any job with self-employment earnings from your K-1. Earn $150,000 in wages and $80,000 in K-1 self-employment income, and the $30,000 above $200,000 picks up the extra 0.9%. These thresholds are not indexed for inflation.
The Net Investment Income Tax is 3.8% on the lesser of your net investment income or the amount your modified adjusted gross income exceeds $200,000 (single) or $250,000 (joint).8Office of the Law Revision Counsel. 26 U.S. Code 1411 – Imposition of Tax Net investment income includes interest, dividends, capital gains, rental income, and income from passive business activities reported on a K-1. If you materially participate in the business, your K-1 income generally falls outside this tax. The calculation runs on Form 8960.9Internal Revenue Service. Instructions for Form 8960 These thresholds are also fixed, not indexed.
Between the two, a high-income K-1 recipient can face an added 0.9% on active self-employment income or 3.8% on passive income above the thresholds.
The 20% Qualified Business Income Deduction
Section 199A lets eligible K-1 recipients deduct up to 20% of their qualified business income before the brackets apply, which lowers the effective rate on that income. The deduction was created by the Tax Cuts and Jobs Act and made permanent by the One, Big, Beautiful Bill Act.10Internal Revenue Service. Qualified Business Income Deduction It is available whether you take the standard deduction or itemize.
Below the income thresholds the deduction is straightforward. Above them it gets complicated, particularly for specified service businesses such as law, medicine, and consulting. For 2026 the phase-out begins at $201,750 for single filers and $403,500 for joint filers; above $276,750 (single) and $553,500 (joint), service business owners lose the deduction entirely. Non-service businesses face a separate limitation tied to W-2 wages the business pays and the value of qualified property.11Office of the Law Revision Counsel. 26 U.S. Code 199A – Qualified Business Income The information you need appears in Box 20, Code Z of a partnership K-1.1Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) At a 24% marginal rate, a full 20% deduction brings the effective rate on that business income down to roughly 19.2%.
Trust and Estate K-1s
Income a trust or estate distributes to you and reports on a K-1 is taxed at your individual rates, using the same brackets above. Income the trust or estate keeps is taxed at the entity level on a sharply compressed schedule. For 2026, trusts and estates hit the top 37% bracket at just $16,000 of taxable income:3Internal Revenue Service. Revenue Procedure 2025-32
- 10% up to $3,300
- 24% from $3,301 to $11,700
- 35% from $11,701 to $16,000
- 37% above $16,000
That gap, 37% at $16,000 for a trust versus 37% at $640,600 for an individual, is why trusts distribute income to beneficiaries whenever the trust document allows it. If you are the beneficiary receiving the K-1, the trust brackets are not yours to worry about; your income is taxed at your personal rates.
Estimated Tax Payments Are Your Problem
Pass-through entities do not withhold income tax from K-1 earnings the way an employer withholds from a paycheck, so you are generally responsible for quarterly estimated payments.12Internal Revenue Service. Estimated Tax You need to make them if you expect to owe at least $1,000 after withholding and refundable credits, and your withholding will cover less than 90% of the current year’s tax or 100% of the prior year’s tax (110% if your prior-year AGI exceeded $150,000).
Payments are due in four installments using Form 1040-ES. Missing them triggers an underpayment penalty that accrues from each missed due date, even if you end up with a refund at filing. Setting aside 30% to 40% of expected K-1 income for taxes is a reasonable starting point for a middle-to-upper-bracket taxpayer, more if self-employment tax applies. Between the ordinary brackets, the surtaxes, and self-employment tax, the actual rate on a partner’s K-1 income can climb well past what the top line of the brackets suggests, and the estimated payments need to reflect that.