How Partnerships Are Taxed: Form 1065, K-1s and Partner Tax

A US partnership does not pay federal income tax on its profit. Instead it files an annual information return, Form 1065, and gives each partner a Schedule K-1 showing their share of income, deductions and credits, which the partners then report and pay tax on through their own returns. That is the whole idea of pass-through taxation: the business reports, the owners pay.

The details are where partners get caught out. You can owe tax on money you never took out of the business, your share of profit may also be hit with self-employment tax, and a late Form 1065 is penalized per partner, per month, even when nobody owes a cent. This guide walks through each piece, with figures for the 2025 tax year (returns filed in 2026) unless stated otherwise.

The basic rule: the partnership reports, the partners pay

The IRS is blunt about it: a partnership "doesn't pay tax on its income." Profits and losses pass through to the partners, and each partner reports their share on their personal return. Every domestic partnership must file Form 1065, whether it made money or not.

Two consequences follow, and both matter for planning:

• You are taxed on your share, not your withdrawals. The K-1 partner instructions say you may be liable for tax on your share of partnership income "whether or not distributed." If the business keeps cash to buy equipment, you still owe tax on your allocated profit.
• Partners are not employees. The IRS notes partners should not receive a Form W-2. There is no withholding on your share of profit, so most active partners pay their tax through quarterly estimated payments on Form 1040-ES.

What goes on Form 1065 and Schedule K-1

Form 1065 is the partnership's own return. It reports gross receipts, deductions, and the resulting ordinary business income or loss, plus a long list of separately stated items on Schedule K, such as rental income, interest, dividends, capital gains, charitable contributions and section 179 expense. Separately stated items keep their character when they reach you, because they may be taxed differently on your return.

Schedule K-1 is the slice of Schedule K that belongs to one partner. The partnership must furnish it to each partner on or before the day the partnership return is due. The shares on the K-1 come from the partnership agreement, which is why a clear written agreement saves arguments later.

On your own return, the K-1 figures flow mainly to Schedule E (partnership income or loss), Schedule D (capital items), and Schedule SE (self-employment tax), with other boxes landing on other forms.

Guaranteed payments

A guaranteed payment is an amount paid to a partner for services or for the use of capital, figured without regard to the partnership's income. Think of a fixed monthly draw for the partner who runs the business day to day. The partnership deducts guaranteed payments in arriving at ordinary business income, and reports them to the partner in box 4 of the K-1. The partner reports them as income, even though the business deducted them.

Self-employment tax on partner income

For a general partner, the share of ordinary business income plus guaranteed payments is generally net earnings from self-employment, reported on Schedule SE. Certain investment-type items are excluded, such as most dividends, interest, and rentals from real estate.

Limited partners are treated differently. The Form 1065 instructions say a limited partner's share of income generally is not self-employment income; only guaranteed payments for services they actually rendered count. Whether someone qualifies as a limited partner for this purpose depends on section 1402(a)(13), and this is an area where the IRS has been active, so an LLC member who works in the business should not assume limited-partner treatment without advice.

Worked example: a two-partner Boise supply business

Ana and Marcus run Ridgeline Brew Supply, a general partnership in Boise that sells equipment to home brewers. Their agreement splits profit 60% to Ana and 40% to Marcus, and pays Ana a guaranteed payment of $50,000 a year for managing the shop.

1. Profit before guaranteed payments: sales minus cost of goods and operating expenses come to $230,000 for 2025.
2. Deduct the guaranteed payment: $230,000 − $50,000 = $180,000 of ordinary business income on Form 1065.
3. Allocate per the agreement: Ana's 60% share is $108,000; Marcus's 40% share is $72,000.
4. What each K-1 shows: Ana's K-1 reports $108,000 of ordinary income plus $50,000 of guaranteed payments, so $158,000 is income on her return and, as a general partner, generally subject to self-employment tax. Marcus's K-1 reports $72,000.
5. Cash versus tax: the partners left most of the profit in the business to fund new stock, and Marcus withdrew only $40,000 during the year. He still reports the full $72,000. The distribution itself is generally not taxed again; it reduces his basis in the partnership.

Now suppose they file Form 1065 three months late without an extension. For returns for 2025, the penalty is $255 per partner for each month or part of a month the failure continues, for up to 12 months. Two partners × 3 months × $255 = $1,530, owed even though the partnership itself has no tax due. Each late K-1 can draw its own separate penalty on top.

Deadlines and filing rules for 2025 returns

• Due date: the 15th day of the third month after year end, so March 15 for calendar-year partnerships. Because March 15, 2026 fell on a Sunday, 2025 returns were timely if filed by March 16, 2026.
• Extension: file Form 7004 by the regular due date for an automatic six-month extension. It extends the time to file, and the K-1 deadline moves with it, but partners' own tax payments are still due on their usual dates.
• E-filing: partnerships that file 10 or more returns of any type during the year, counting information returns such as 1099s, must file Form 1065 electronically. Partnerships with more than 100 partners must always e-file.
• Audits: under the centralized partnership audit regime created by the Bipartisan Budget Act of 2015, the IRS audits at the partnership level and deals with a designated partnership representative. Eligible small partnerships can elect out on Schedule B-2 each year.

Losses: four limits before you can deduct them

A partnership loss also passes through, but you can only use it after it clears a series of limits, applied in this order: your basis in the partnership, the at-risk rules, the passive activity rules, and the excess business loss limit. A loss blocked by basis is suspended and carried forward until you have enough basis to absorb it. That is why tracking each partner's capital contributions, share of income and distributions year by year matters so much.

Difference between a partnership and a corporation

C corporation

• A separate taxpayer that files Form 1120 and pays corporate tax at a flat 21% on its taxable income.
• Profits are taxed again when paid out as dividends, which the IRS describes as a double tax.
• Shareholders cannot deduct the corporation's losses on their own returns.

S corporation

• Passes income, losses, deductions and credits through to shareholders, like a partnership, and files Form 1120-S.
• Limited to 100 shareholders and one class of stock, with restrictions on who can own shares.
• Shareholder-employees must be paid reasonable compensation as wages before taking non-wage distributions.

Partnership

• One level of tax, at the partner level.
• No limit on the number or type of partners, and allocations follow the partnership agreement.
• Working general partners generally pay self-employment tax on their whole share of ordinary income, not just a salary.

Common mistakes partners make

• Skipping estimated payments because no cash was distributed, then facing an underpayment penalty.
• Treating guaranteed payments as wages and issuing a W-2 to a partner.
• Not tracking basis, which makes it impossible to know whether a loss is deductible or whether a distribution is taxable.
• Missing the March deadline on the assumption that an information return with no tax due carries no penalty.
• Mixing partner draws with expenses in the books, which understates profit and distorts every partner's K-1.

hellobooks< / a > -helps-you-get-the-partnership-return-right">How HelloBooks helps you get the partnership return right

Your preparer builds Form 1065 from your books, so clean books are where an accurate return starts. In HelloBooks you can set up a chart of accounts with a separate capital account and drawings account for each partner, and a dedicated expense account for guaranteed payments, so draws never get booked as expenses. Bank feeds, bank rules and AI auto-categorization keep transactions coded through the year, and the trial balance, general ledger and P&L give your CPA the figures they need at year end. Period locking and year-end close stop anyone changing 2025 after the numbers have gone onto the K-1s, and the audit trail shows who changed what if a question comes up later. HelloBooks keeps the books; your preparer still prepares and files the return.

This is general information as of November 2026 for US partnerships, not tax or legal advice; check the IRS Form 1065 instructions or ask a CPA about your partnership's situation.