There shouldn't be any overlap in income between the W-2 and the K-1. The W-2 shows earnings you received by paycheck as an employee, which should have had payroll taxes deducted and sent in by the company.
The K-1 shows your share of the partnership's income or loss that is yours because you are a partner. You may or may not have received some of this as a cash distribution, but it is still income to you.
These are two distinctly different types of income, and need to be shown as different income sources.
I did receive a k-1 and a w-2 that both report the exact amount for the same income... did my tax guy do something wrong? I have a tax guy that does the business s-corp tax and then I was going to just do my personal through turbo tax. Do i just ignore the k-1 and use the w-2?
No, don't ignore anything. Ask your tax guy about it. From your description, yes, it seems wrong. Look at the corporate tax return (Form 1120-S), and check if it shows your wages on Line 7 (check Line 8 too, in case it was misplaced there).
I am curious about what happened here because I still have the same question. How are K1 and W2 distinctly different types of income and what did the 'tax guy' say about them being exactly the same? Was that an error? Here is my watered down scenario- 2 person business- one owner/one co-owner, set up as an S Corp, total sales $20000, total expense $13000, BOTH employees got paid $10000 in W2, owner has 98% interest in business while co-owner has 2%. What am I missing?
This is happening to me too. My k1 is showing all income recieved but some of it is from w2.
@stebecas You can not receive a W-2 when you are Partner. Was that the case, or were you an employee for part of the year, then you became a Partner?
Hi, the business is setup as an S Corp- me as President (98% shares) and my daughter as VP (2% shares). We pay ourselves via W2. Maybe the K1 doesn't even come into 'play' with us?
@sharrobins2 So Box 1 of the K-1 should reflect the profit of the corporation AFTER your wages were subtracted.
If my expenses were more than what we took in, then it would be a loss. We are in 1st year of business so expenses were high for startup. Correct?
Yes, Box 1 of your K-1 would show a loss. If you have "Basis" in the corporation, that loss would be deductible against other income on your personal tax return.
Thanks "TaxGuyBill", you have been very helpful. I have an accountant who will do all of this for me but I like to be well informed before the process begins. Have a good day!
Hi TaxGuyBill,
I am partnering with an existing business owner to acquire ownership through profit sharing contributions. The idea is to use profit sharing to purchase shares, up to and including 20%. The agreement is drafted for 2 years of automatic share purchases from the eligible profit sharing. My question is how can I use 100% of the profit sharing to purchase the shares pre-taxed, at least until all shares are purchase and the excess be taxed as income. Below are the brief details to the agreement.
Goal: 2 year plan to gain 20% ownership by the end of year 2. Profit sharing will be automatically rolled into purchasing up to 200,000 shares of a 1,000,000 share company at $1.30 per share.
Example: year 1 yields $130K in eligible profit sharing, to purchase 100,00 shares; 10%. Year 2 yields $65K in profit sharing and $65K in equity returns; 100% vested.
Year 1: Profit sharing will be automatically rolled into purchasing. Remaining share percentage (10%) will be the eligible profit sharing for year 2.
Year 2: Eligible profit sharing (10% per example) and equity returns from shares purchased in Y1 are automatically rolled into purchasing the remaining shares (10%) . Any excess returns are to be received and taxed as income.
Please tell me if there is a tax differed strategy to do this without the profit shares or equity returns being taxed before purchasing the shares. Otherwise, I will need to pay out of pocket for any remaining shares. As you can imagine, I would have to write a very big check if taxed before purchasing shares. Any and all advice is much appreciated.
@Hautehead wrote:Goal: 2 year plan to gain 20% ownership by the end of year 2. Profit sharing will be automatically rolled into purchasing up to 200,000 shares of a 1,000,000 share company at $1.30 per share.
Go to a good tax professional.
It is crazy to be planning something complex involving hundreds of thousands of dollars without sitting down with a good tax professional that look at all of the details.
And assuming you mean retirement accounts when you are referring to "pre-tax" and "profit sharing", that further complicates things, including the fact there are limitations for contributing to retirement accounts.
Again, go to a tax good professional.
another wrinkle is that a retirement a/c owning an interest in a profit-making business may have to file 990-T to pay tax on unrelated business income. another issue, how do you get the money out if you need it. under
59-1/2, there's a penalty. company goes belly up - no deduction - you suffer the loss thru a reduced value of the profit-sharing a/c. see a pro
So if there is 2 partners in a LLC they don’t need a W-2 only Schedule K-1 to report their individual income?
@jcastrillo1 wrote:So if there is 2 partners in a LLC they don’t need a W-2 only Schedule K-1 to report their individual income?
Correct, Partners do NOT receive a W-2.
The IRS is penalizing me (Charge 549) for "failure to file forms W-2". It's my understanding that an S-Corp only needs K-1 if there are no employees and only 2 equal shareholders. This is also for a company that closed and made no money that year, therefore was a final return.
Am I correct that filing a final 1120S without W-2 is ok?
Thank you!
The shareholders ARE employees, so the corporation did have two employees.
Did you report anything on Line 7 or 8 of the 1120-S?
if there is an amount on line 7 or 8 consult a tax pro ASAP. you have a substantial tax issue that's going to require the services of a pro.
What if a company k1 form shows a W2 yet never paid the wages?
A K-1 does not show a W-2. Can you clarify what you mean?
YEs your tax guy definitely did something wrong.
the W2 and the K1 are totally different types of income.
the W2 shows what you were paid via Paycheck, what you paid in taxes, 401K contributions etc.
the K1 shows the company gain or loss that as an S corp will pass through to your taxes and will adjust your overall income, up or down.
Yeah something is seriously wrong
TaxGuyBill
So if I understand correctly...if I have 2% ownership in a LLC and also work full time on a monthly salary, are you saying the salary should be W2? In the past all employee/owners get a K1 that has had the business tax credits deducted out of each owners K1 example: if you were paid 50k and your 2% of the tax deduction is 1k then your K1 will show 49k and it is up to the owner/employee to pay taxes as a K1. I always felt that if your working as an employee that they should all be paid W2.