K-1 vs. W-2: Key Tax and Income Differences

The Form W-2, Wage and Tax Statement, and the Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., both report income to a taxpayer and the Internal Revenue Service (IRS). However, they represent fundamentally different financial relationships with a business entity. A W-2 signifies an employer-employee relationship, while a K-1 indicates an ownership stake in a pass-through business. Understanding the distinctions between these two forms is important for proper tax planning and compliance.

Understanding Form W-2

Form W-2 is a statement employers must send to their employees and the IRS by January 31 each year. It summarizes the total earnings and tax withholdings for the calendar year, reflecting a traditional employment arrangement for a salary or hourly wage. The form serves as an official record of compensation paid and taxes collected on the employee’s behalf.

The details on a W-2 are broken down into standardized boxes. Box 1 reports total taxable wages, tips, and other compensation, which is the figure used for a personal tax return. Other boxes show federal income tax withheld (Box 2) and the amounts withheld for Social Security and Medicare taxes (Boxes 4 and 6).

These Social Security and Medicare taxes are part of the Federal Insurance Contributions Act (FICA). Under the W-2 system, employers are required to deduct and remit these taxes from an employee’s paycheck throughout the year. This “pay-as-you-go” withholding means an employee’s tax liability is being addressed with each paycheck, reducing the likelihood of a large tax bill at the end of the year.

Understanding Schedule K-1

A Schedule K-1 is a tax document issued by pass-through business entities to their owners or partners. These businesses, including partnerships, S corporations, and certain LLCs, do not pay income tax at the corporate level. Instead, they “pass through” their financial results—profits, losses, deductions, and credits—to the individual owners to report on their personal tax returns. The business must provide the K-1 to its partners by March 15, though this can be extended.

Unlike a W-2, a K-1 provides a detailed breakdown of the business’s financial activities allocated to a specific owner. For example, a K-1 will report a partner’s share of ordinary business income, rental real estate income, interest, dividends, and capital gains. It also reports the owner’s share of business deductions and tax credits, reflecting the performance of the business itself.

The income reported on a K-1 is the owner’s earnings from their investment in the business, which is distinct from a salary. An individual can be both an employee and an owner of the same S corporation. In that case, they would receive both a W-2 for their reasonable salary and a K-1 for their share of the company’s profits.

Key Differences in Tax Treatment

The tax obligations for W-2 and K-1 income differ significantly, reflecting the roles of an employee versus a business owner. These differences impact tax withholding, who pays employment taxes, and the schedule for making tax payments.

Tax Withholding

W-2 income is subject to automatic tax withholding. Employers are legally required to deduct federal, state, and FICA taxes from an employee’s paycheck based on their Form W-4 and remit them to government agencies. In contrast, income reported on a Schedule K-1 has no tax withholding. The business does not pay taxes on behalf of its owners, so the responsibility falls entirely on the recipient.

Employment Taxes

For a W-2 employee, FICA taxes are a shared responsibility. The employee pays 7.65% (6.2% for Social Security and 1.45% for Medicare), and the employer matches this amount for a total of 15.3%. The Social Security portion is subject to an annual wage base limit ($176,100 for 2025), but there is no wage limit for the Medicare tax.

Recipients of K-1 income from a partnership or an LLC taxed as a partnership are generally considered self-employed. They are responsible for paying self-employment (SECA) tax on their net earnings from the business. The SECA tax rate is 15.3%—12.4% for Social Security and 2.9% for Medicare—covering both the employee and employer portions. The same Social Security wage base limit applies, and the K-1 recipient can deduct one-half of their self-employment tax on their personal return.

Tax Payment Responsibility

The lack of withholding on K-1 income creates a different payment schedule for business owners. To avoid underpayment penalties, individuals with significant K-1 income must make quarterly estimated tax payments to the IRS using Form 1040-ES. These payments must cover both income tax and self-employment tax, with the following due dates:

• April 15
• June 15
• September 15
• January 15 of the following year

Business-Related Deductions

A potential benefit for K-1 recipients is the Qualified Business Income (QBI) deduction, established under Section 199A. This provision allows eligible owners of pass-through businesses to deduct up to 20% of their qualified business income, a deduction not available for W-2 wage income. The QBI deduction is complex and subject to limitations based on income and business type. This deduction is scheduled to expire for tax years beginning after December 31, 2025, unless extended by new legislation.

Reporting Income on Your Tax Return

The process of transferring information from a W-2 or K-1 to a personal tax return, Form 1040, differs in complexity, reflecting the simplicity of wage income versus the intricacies of business ownership.

For a W-2 recipient, the process is direct. The total wages from Box 1 of the W-2 are entered on Line 1a of Form 1040. The federal income tax withheld, found in Box 2, is reported in the payments section of the Form 1040. State and local withholding information is similarly transferred to the corresponding state tax returns.

Reporting K-1 income is more involved because the form contains various types of income, losses, and deductions that must be reported on different parts of the tax return. Most commonly, ordinary business income or loss from the K-1 is transferred to Schedule E (Supplemental Income and Loss). The total from Schedule E then flows to Schedule 1 of the Form 1040 and ultimately to the main form.

Other items from the K-1 are reported elsewhere. For instance, interest and dividend income are reported on Schedule B, while capital gains are reported on Schedule D. Furthermore, the net earnings from self-employment shown on the K-1 are used to calculate the self-employment tax on Schedule SE (Self-Employment Tax), which is then added to the taxpayer’s total tax liability.