A K-1 partnership is a business taxed as a partnership — general, limited, limited liability, or a multi-member LLC that has elected partnership treatment — that issues each partner a Schedule K-1 reporting their share of the entity’s income, deductions, and credits. The partnership itself pays no federal income tax. You do, on your individual return, based on the numbers your K-1 hands you.
Why You Owe Tax Even Without a Payout
Partnerships are pass-through entities. The business earns revenue and takes deductions, and the resulting profit or loss flows straight through to the partners in the percentages set by the partnership agreement. Each partner reports their share on their personal return and pays tax at their own rate. That avoids the double taxation that hits C corporations, where profits are taxed at the entity level and again as dividends.
The important consequence: you owe tax on your allocated share whether or not the partnership actually distributes cash to you. If the business earns $100,000 and you have a 25 percent share, $25,000 lands on your return even if every dollar was reinvested in the business.
What Your Schedule K-1 Actually Reports
Schedule K-1 (Form 1065) translates the partnership’s overall results into your individual slice. It identifies the partnership by EIN and you by SSN or TIN, and Internal Revenue Code Section 6031 requires the partnership to furnish it to you each year.1Office of the Law Revision Counsel. 26 USC 6031 – Return of Partnership Income2Internal Revenue Service. Schedule K-1 (Form 1065) 2025
Beyond ownership percentages, your share of partnership liabilities, and a capital account rolling forward from your beginning balance through contributions, allocated income, distributions, and ending balance, the numbered boxes carry the tax figures that matter:3Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065)
- Box 1 — ordinary business income or loss
- Box 2 — net rental real estate income or loss
- Box 4a — guaranteed payments for services
- Box 14, Code A — self-employment earnings
- Box 20, Code Z — information for the qualified business income deduction
Additional boxes cover interest, dividends, capital gains, charitable contributions, and foreign taxes. Certain items must be stated separately rather than folded into Box 1, because each partner’s own filing status, other income, and deductions determine how they’re ultimately taxed.4eCFR. 26 CFR 1.703-1 – Partnership Computations One thing your K-1 doesn’t give you: your outside tax basis. The capital account shown is not the same figure, and you’re responsible for tracking basis yourself.
How to Report K-1 Income on Your 1040
Most K-1 items flow to Schedule E (Supplemental Income and Loss), Part II, line 28. Ordinary business income from Box 1 goes in column (i) or (k) if you materially participated, or column (h) if you didn’t.3Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065) Items with their own home on the return go there instead: capital gains land on Schedule D, and so on. Tax software handles the routing once you enter the K-1 data. If you paper file, include the K-1 information with your Form 1040 and Schedule E so the IRS sees the full picture; missing K-1 data is a common trigger for automated underreporting notices.
Guaranteed Payments
Guaranteed payments in Box 4a are amounts the partnership pays you for services regardless of whether the business turns a profit, functionally similar to a salary. Report them in column (k) of Schedule E, line 28, even if you don’t materially participate in the partnership’s other activities, and keep them separate from your Box 1 share of ordinary business income.3Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065)
Health Insurance Paid by the Partnership
Premiums the partnership pays on your behalf are included in your income as guaranteed payments on your K-1. You then claim the self-employed health insurance deduction on Schedule 1 (Form 1040), line 17, for yourself, your spouse, and your dependents.5Internal Revenue Service. Instructions for Form 7206 You need net self-employment earnings from the partnership (K-1 Box 14, Code A) to qualify. The deduction reduces income tax; it does not reduce self-employment tax.
Self-Employment Tax on Partnership Income
General partners owe self-employment tax on their share of partnership income. The combined rate is 15.3 percent: 12.4 percent for Social Security on the first $184,500 of combined earnings in 2026, and 2.9 percent for Medicare on all earnings with no cap.6Social Security Administration. Contribution and Benefit Base The figure in K-1 Box 14, Code A carries to Schedule SE (Form 1040).
Limited partners generally don’t owe self-employment tax on their share of partnership income. The IRC 1402(a)(13) exclusion was designed for partners whose role is essentially that of an investor.7Internal Revenue Service. Self-Employment Tax and Partners Two caveats: guaranteed payments for services are always subject to self-employment tax, even for a limited partner, and rental income and capital gains are generally outside self-employment tax regardless of partner type.
The 20% Qualified Business Income Deduction
Partners can generally deduct up to 20 percent of their qualified business income from the partnership under Section 199A. The partnership reports your share of QBI, W-2 wages, and the unadjusted basis of qualified property in Box 20, Code Z, and you calculate the deduction on Form 8995 or 8995-A.8Internal Revenue Service. Partners Instructions for Schedule K-1 (Form 1065) – Section: Box 20, Code Z
The full 20 percent is available without limitation if your taxable income before the QBI deduction is under roughly $203,000 single or $406,000 married filing jointly for 2026. Above those thresholds, limits phase in based on the partnership’s W-2 wages and qualified property, and the deduction can be reduced or eliminated for specified service businesses such as law, accounting, consulting, and financial services. The One Big Beautiful Bill Act, signed in 2025, made the Section 199A deduction permanent and widened the phase-in ranges.
When Your K-1 Shows a Loss
A loss on your K-1 doesn’t automatically translate to a deduction. Partnership losses have to clear three limitations in order, and a loss blocked at one stage doesn’t advance to the next.
- Basis limitation. You can deduct losses only up to your adjusted tax basis in the partnership — capital contributions, share of liabilities, and accumulated income, minus distributions. Basis never goes below zero, and excess losses carry forward.9Internal Revenue Service. Publication 925 Passive Activity and At-Risk Rules
- At-risk limitation. Remaining losses are then limited to the amount you have at risk, generally your cash investment plus your share of recourse debt for which you bear personal economic risk. Report the calculation on Form 6198.
- Passive activity limitation. If you don’t materially participate, any losses that survive the first two tests are passive and can generally offset only passive income. Rental real estate has a narrow exception: up to $25,000 in losses if you actively participate and your modified AGI is $100,000 or less, phasing out completely at $150,000.9Internal Revenue Service. Publication 925 Passive Activity and At-Risk Rules
Losses blocked by these rules aren’t lost. They carry forward to a year in which you have enough basis, at-risk amount, or passive income to absorb them.
Deadlines and Late K-1s
The partnership has to file Form 1065 and deliver Schedule K-1s by the 15th day of the third month after its tax year ends — March 15 for calendar-year partnerships.10Internal Revenue Service. 2025 Instructions for Form 1065 The partnership can request an automatic six-month extension on Form 7004, pushing its deadline to September 15.11Internal Revenue Service. About Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns
That extension covers the partnership only. It does not extend your personal April 15 deadline for filing or paying. If your K-1 arrives late, file your own extension on Form 4868, which gives you until October 15 to file your 1040 without a late-filing penalty; interest still accrues on any tax not paid by April 15.12Internal Revenue Service. Get an Extension to File Your Tax Return If the K-1 still hasn’t arrived when your return is due (including extensions), file Form 8082 to tell the IRS the schedule is missing and to report the items you’re including based on what you know. Don’t file a return you know is incomplete without disclosing what’s missing.
Quarterly Estimated Tax Payments
No tax is withheld from your partnership income the way it is from a paycheck, so you have to send in quarterly estimates on Form 1040-ES. The due dates are April 15, June 15, September 15, and January 15 of the following year.13Internal Revenue Service. Businesses – Estimated Tax: Partnerships
To avoid an underpayment penalty, pay at least 90 percent of your current-year tax or 100 percent of your prior-year tax, whichever is smaller. If your prior-year AGI topped $150,000 ($75,000 if married filing separately), the prior-year safe harbor rises to 110 percent.14Internal Revenue Service. Estimated Taxes Underpayment penalties accrue from each quarterly due date, not just at year-end, so a new partner with unpredictable income should estimate conservatively rather than wait to true up in April.