Quick answer: A partnership, including most multi-member LLCs, files an annual information return on Form 1065 but generally pays no federal income tax itself. Instead it issues each owner a Schedule K-1 showing their share of income, deductions, and credits, which the owner reports on their own return and pays tax on whether or not cash was distributed. For calendar-year partnerships the federal return and K-1s are generally due March 15, with a six-month extension available.
Partnerships are common in Central New York, from family real estate holdings to professional practices and two-owner contracting firms. They are flexible, and that flexibility is exactly what makes them confusing. Owners can split profits in ways that do not match their ownership percentages, contribute property instead of cash, and take money out in several different forms. All of that has to be tracked carefully, or the K-1s that land in each partner's mailbox will be wrong.
How a partnership is taxed
A partnership is a pass-through entity. The business calculates its income on Form 1065, then allocates it to the partners according to the partnership agreement. Each partner pays tax on their allocated share on their own return.
The point owners most often miss: you are taxed on your share of profit, not on what you took out. If the partnership earned $200,000 and you own half, you report $100,000 even if the business kept every dollar to pay down a loan or buy equipment. This is why many partnership agreements include provisions for tax distributions, so partners have cash to pay the tax on their share.
A single-member LLC is not a partnership. By default it is disregarded for federal income tax and reported on the owner's own return. Once a second member joins, the LLC generally becomes a partnership and must start filing Form 1065.
Reading your Schedule K-1
The K-1 is a dense form, but a few boxes do most of the work:
- Ordinary business income or loss. Your share of the operating profit.
- Guaranteed payments. Amounts paid to you for services or capital regardless of profit, which are taxed as ordinary income and usually subject to self-employment tax.
- Rental income, interest, dividends, and capital gains. Reported separately because they are taxed differently.
- Section 179 deduction and other separately stated items. Passed through for you to apply at the partner level.
- Self-employment earnings. Used to calculate your self-employment tax.
- Capital account and liabilities. Show your equity in the partnership and your share of its debts, which affect your basis.
Many K-1s also include state schedules and footnotes. If you live in New York and the partnership does business in other states, those footnotes may affect your resident credit or create nonresident filing requirements elsewhere.
Basis: why it matters to every partner
Your basis is roughly what you have invested in the partnership, adjusted each year: it goes up with contributions and your share of income, and down with distributions and your share of losses. It also includes your share of certain partnership debts.
Basis matters for three reasons. First, you generally cannot deduct losses beyond your basis. Second, cash distributions in excess of basis are generally taxable. Third, when you sell your interest, basis determines your gain or loss. The partnership's capital account reporting helps, but it does not always equal your tax basis, so each partner should keep their own running calculation. We find that partners who have tracked basis from day one have far easier conversations at sale time.
Deadlines, penalties, and New York filings
For calendar-year partnerships, Form 1065 and K-1s are generally due March 15, a month before individual returns. An extension to September 15 is available, but partners waiting on late K-1s may need to extend their own returns too.
The IRS charges a late-filing penalty for each partner for each month the return is late, even if no tax is owed, so a missed deadline adds up quickly for a partnership with several owners. The per-partner amount is adjusted each year.
New York partnerships with New York source income generally file Form IT-204, and LLCs and partnerships with New York income may also owe an annual filing fee based on gross income, reported on Form IT-204-LL. Partnerships that elected the state's pass-through entity tax have separate filings and estimated payments for that, which we cover in our article on the New York pass-through entity tax. Partnerships with nonresident partners may also have estimated tax obligations on those partners' behalf.
Keeping a partnership's books K-1 ready
The quality of the K-1 depends on the quality of the books. A few practices make year-end much smoother:
- Record every partner contribution and distribution in separate equity accounts for each partner.
- Separate guaranteed payments from regular draws.
- Keep the partnership agreement current, especially the allocation and distribution provisions.
- Track partnership debt and who is personally liable for it.
- Close the books monthly so year-end is a review, not a rebuild.
If you are deciding whether a partnership structure is the right fit in the first place, our article on choosing a business entity compares it with the alternatives.
Frequently asked questions
Why is my K-1 showing income when I received no money?
Because partners are taxed on their share of profit, not on distributions. The partnership may have used the cash to pay debt, buy equipment, or build reserves. Your basis increases by the income reported, so you will not be taxed again when that cash is eventually distributed.
Can I file my personal return before I get my K-1?
You should not. Filing without the K-1 and then amending is more expensive and error-prone than extending. If the partnership is running late, file an extension for your personal return and make an estimated payment with it.
Are guaranteed payments the same as a salary?
They serve a similar purpose, but partners are not employees, so there is no W-2 and no withholding. Guaranteed payments are reported on the K-1 and are generally subject to self-employment tax, so partners usually cover the tax through estimated payments.
What happens when a partner leaves?
The partnership needs to handle the departing partner's final allocation, any redemption payments, and possibly adjustments to the basis of partnership assets. The partnership agreement and the timing of the exit both matter, so plan it before it happens.
This article is general information for 2026, not tax or legal advice for your situation. Tax rules and figures change; confirm current amounts with the IRS, New York State, or your accountant before acting.
Related service: Business & Corporate Tax