There are several hundred different kinds of IRS forms that are potentially required for American citizens. Does that number scare you? If you’re like most entrepreneurs, it can certainly get confusing as you try to keep them organized. The letter and numeral naming system means that many of the names sound strikingly similar (you’d be surprised how many people confuse the W-2, W-3, and W-4).
I propose that we name the forms like we do hurricanes and tropical storms. It would give each a unique identity. For example, it’d be easy to remember that you need to submit IRS Form Steven every year. And something like Form 1120-H would probably seem a lot less stuffy and intimidating if it were named IRS Form Susan.
In the meantime, however, we need to work with what we have. So we’re going to take some time in this article to learn about the Schedule K-1 Tax Form.
What Is the Schedule K-1 Tax Form?
As with other IRS forms, the Schedule K-1 is issued each year. Just because you’re a business owner doesn’t mean that you’ll be required to submit it. It all comes down to how your business is structured.
“A Schedule K-1 is required for partners in a general partnership, limited partnership, LLP, LLC members, and shareholders of S corporations,” explains tax expert Jean Murray. “Single-owner LLCs don’t use a Schedule K-1 to report the business income; they use a Schedule C-Profit or Loss from Business. Partners and shareholders of S corporations must file a Schedule K-1 to report income, losses, dividend receipts, and capital gains. The partnership Schedule K-1 is used to show income distribution to members in a multiple-member LLC, which is taxed as a partnership.”
Those who are in partnerships are required to account for their net income using the Partnership Tax Return, Form 1065. And the Schedule K-1 tax form is an important part of that effort. As mentioned above, LLP, LLC members, and S corporations shareholders may also need to submit this form. It’s worth noting that when income is distributed from a trust or estate to beneficiaries, the form also might become applicable.
You might have noticed a trend that the K-1 tax form is often necessary when a group of people is involved in some form of shared enterprise. This form helps distinguish each individual’s role, rather than viewing the organization as a single unit. The IRS wants to understand each individual’s share of the income, as well as the role that losses played in their finances.
What Is the Timing for a Schedule K-1 Tax Form?
If you are required to use a K-1 tax form, you should receive it by March 15. For those of us who like to get our taxes wrapped up early in the year, it can be extremely frustrating to wait until mid-March to receive such a crucial document. But that’s just 1 of the concessions you sometimes have to make when joining up with others in an enterprise.
Once you’ve gotten your K-1 tax form, you’ll be able to work on figuring out all the necessary details so you can include it with your personal tax return. Depending on the structure and nature of your enterprise, this process can be fairly complex. For this reason, you should seek the expert advice of a tax professional. They’ll be able to walk you through the process and help you avoid common mistakes.
How Do You Get Ready for the Schedule K-1 Tax Form?
Of course, preparing for a successful tax season starts long before you receive your K-1 tax form in the spring. It’s essential that you keep your finances organized throughout the year so that your data is all organized and you’re ready to hit the ground running when the time comes.
“Here’s a sobering statistic: About 20% of small businesses will fail within their first year,” explains small business guru Wendy Nguyen. “Worse, nearly 50% of businesses will fail by the end of their 5th year, according to data from the US Bureau of Labor Statistics. The most common culprit? How a small business handles its financial resources, whether it’s a lack of capital, inadequate business planning, or mismanaging their cash flow and marketing budgets.”
One of the best ways to keep your financial resources healthy and organized is to get reliable bookkeeping software. These programs automate tasks, eliminate guesswork, and handle much of the heavy lifting. When it comes time to tackle your taxes, much of the information will simply transfer to your tax documents.
Sunrise offers 1 of the best bookkeeping software products on the market at no charge to small business owners. Yep, it’s absolutely free. And if you also want the expert guidance of a personal bookkeeper, there are affordable plans. So you can easily choose the right services and features for your unique needs.