S Corporation Owners
If you own and work for an S corporation, receiving both a Form W-2 and Schedule K-1 from the same business can be completely normal. The two forms report different parts of your relationship with the corporation and are handled differently on your individual tax return.
The important part is making sure the wages, K-1 activity, distributions, shareholder basis, and other S corporation items are properly coordinated when your Form 1040 is prepared.
Why Would an S Corporation Owner Receive Both a W-2 and a K-1?
The W-2 reports compensation you received as an employee of the S corporation. Those wages are generally subject to payroll taxes and income tax withholding.
The Schedule K-1 reports your share of the S corporation's tax items as a shareholder. Depending on the business, the K-1 may report ordinary business income or loss as well as separately stated deductions, credits, investment items, rental activity, or other tax information.
W-2 vs. Schedule K-1
Your W-2
Your W-2 generally reflects wages paid to you for services you performed as an employee of the corporation.
It can include federal and state income tax withholding, Social Security and Medicare wages and taxes, retirement-plan information, and other employee compensation items.
Your Schedule K-1
Your K-1 generally reports your share of the corporation's income, deductions, credits, and other tax items based on your ownership.
Unlike your W-2 wages, your share of S corporation income reported on Schedule K-1 generally is not subject to self-employment tax.
Your K-1 Income Is Not the Same Thing as the Cash You Received
This is one of the most important concepts for S corporation owners. The taxable income reported to you on Schedule K-1 and the cash distributed to you by the corporation are not necessarily the same amount.
You may be required to report your share of S corporation income even if the corporation did not distribute that entire amount to you in cash. Conversely, a cash distribution is not automatically additional taxable income merely because money moved from the corporation to you.
The tax treatment of distributions can depend on factors including your shareholder stock basis and the corporation's tax history.
What About Reasonable Compensation?
If you perform services for your S corporation, compensation is an important part of the tax picture. The IRS requires shareholder-employees to receive reasonable compensation for services performed before treating amounts as non-wage distributions.
Determining reasonable compensation is a business-level payroll and S corporation issue rather than something that can simply be fixed by entering a different number on your personal tax return. Your individual return should be prepared consistently with the corporation's payroll reporting and Form 1120-S.
How the S Corporation Affects Your Personal Tax Return
Preparing an S corporation owner's Form 1040 may require coordinating several items rather than simply entering one K-1 number.
Salary and other employee compensation reported by the corporation.
Your shareholder share of the corporation's taxable items.
Basis can affect the deductibility of losses and taxation of certain distributions.
Pass-through income may create tax beyond what was covered by withholding from wages.
The K-1 can contain deductions, credits and other items requiring separate treatment.
Business activity may also create state tax considerations on your individual return.
Common Issues We Look For
Missing or Late K-1s
Your personal return may need to wait until the S corporation return is completed and the final Schedule K-1 is available.
Basis Questions
Losses and distributions can make accurate shareholder basis information particularly important.
Wages and Distributions
Payroll, shareholder distributions, and the corporation's tax reporting should tell a consistent story.
Insufficient Withholding
W-2 withholding may not be enough to cover the tax attributable to pass-through business income and other household income.
What Should You Have Before Your Personal Return Is Prepared?
In addition to your other personal tax documents, an S corporation owner will generally need the final Form W-2 and Schedule K-1 from the corporation. Depending on your situation, additional information may also be necessary.
If the business return has not yet been completed, your personal return may not be ready for final preparation because the final K-1 information is not yet available.
Need the S Corporation Return Prepared Too?
TaxReturn.cpa is focused on individual income tax returns. Form 1120-S business tax return preparation is handled separately through Boulanger CPA and Consulting PC.
If your S corporation return is already complete and you have your final Schedule K-1, TaxReturn.cpa can prepare the individual return that reports the resulting shareholder tax items.
Related S Corporation & Business Owner Tax Resources
Frequently Asked Questions
Is it normal to receive both a W-2 and K-1 from my S corporation?
Yes. A shareholder who works for an S corporation may receive a W-2 for employee compensation and a Schedule K-1 reporting the shareholder's share of the corporation's tax items.
Do I pay self-employment tax on my S corporation K-1 income?
Generally, your share of S corporation income reported on Schedule K-1 is not self-employment income. Wages paid to you as an employee are separately subject to applicable payroll taxes.
Are S corporation distributions the same as K-1 income?
No. K-1 income generally reflects your share of the corporation's tax items, while distributions reflect cash or property transferred to you. The two amounts do not have to be the same.
Can I file my personal return before my S corporation return?
Usually you will need the final Schedule K-1 from the S corporation before completing the individual return. Filing before the final business information is available can create the need for corrections or an amended individual return.
Have an S Corporation K-1 on Your Personal Return?
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