A W-2 reports wages paid by an employer to an employee. A K-1 reports a partner's or shareholder's distributive share of income, deductions, and credits from a pass-through entity. Both end up on your Form 1040, but they are taxed through completely different mechanisms. The same $100,000 of income looks and is taxed very differently depending on whether it arrives as a W-2 or a K-1 - and understanding that difference is essential for anyone who receives both.
W-2: Withholding handled by employer. FICA split 50/50 with employer. No basis limits on income. Losses not applicable. Limited ability to deduct expenses post-TCJA. Arrives by January 31.
K-1: No withholding - estimated taxes your responsibility. Full SE tax if active partnership (15.3% on net earnings). Income can be limited by basis, at-risk, and passive activity rules. Losses can offset other income (with limits). Arrives by March 15 (or later with extension). Can deduct allocated business expenses.
| Feature | W-2 (Employee) | K-1 (Pass-Through Partner/Shareholder) |
|---|---|---|
| Withholding | Automatic - employer withholds income tax and FICA | None - must make quarterly estimated tax payments (Form 1040-ES) |
| FICA / SE Tax | Split with employer: 7.65% employee + 7.65% employer = 15.3% total | General partners and active LLC members: 15.3% self-employment tax on net earnings (both halves). S-corp shareholders: only on W-2 salary paid by corporation, not on K-1 distributions. |
| Loss Deductibility | No losses - wages are always positive income | Allocated losses may be deductible subject to: (1) basis limit, (2) at-risk limit, (3) passive activity loss rules. All three must allow the loss. |
| Tax Form Issued | W-2 by January 31 | K-1 (Form 1065 or 1120-S) by March 15; may be extended to September 15 |
| Retirement Plan | Employer 401(k) - $23,500 employee contribution limit | Self-employed plans (SEP-IRA, SIMPLE, solo 401k) based on net SE income |
| Health Insurance | Employer pays; excluded from income | S-corp 2%+ shareholders: must include in W-2 wages to deduct; partners: §162(l) above-the-line deduction |
| QBI Deduction | Wages do not qualify for §199A QBI deduction | Active trade or business K-1 income may qualify for up to 20% §199A deduction |
| Business Expenses | Post-TCJA: employee business expenses not deductible (through 2025+) | Partnership/S-corp deducts business expenses at entity level, reducing K-1 income before it reaches you |
For active general partners and single-member LLC members, K-1 ordinary income from business operations is subject to self-employment tax under IRC §1402. At net earnings of $100,000, the SE tax is approximately $14,130 (15.3% on the first $184,500, 2.9% above). The SE tax is in addition to regular income tax - not instead of it. The one offset: half of SE tax paid is deductible above the line on Schedule 1, which reduces adjusted gross income.
S-corp shareholders avoid SE tax on K-1 distributions - but only because the IRS requires them to pay themselves reasonable compensation as W-2 wages, on which FICA applies. The total FICA burden may be lower than a partnership, but it is not eliminated.
K-1 losses are subject to three sequential limitations. A loss blocked at any layer cannot be used until that layer permits it. They apply in order: (1) basis limit - cannot deduct more than your basis in the entity; (2) at-risk limit - cannot deduct more than amounts at risk of loss (excludes certain nonrecourse financing in some cases); (3) passive activity loss limit - losses from passive activities (activities in which you do not materially participate) can only offset passive income. W-2 losses do not exist - wages are never negative income.
Many business owners receive both W-2 income (from their S-corp salary) and K-1 income (from the same S-corp or other entities). The withholding on the W-2 portion covers only the wage portion - estimated payments are needed for the K-1 portion. Underpayment penalty (IRC §6654) applies if total tax payments are below 90% of the current year's tax or 100% of the prior year's tax (110% if prior year AGI exceeded $150,000). Model the combined picture each quarter, not just the W-2 withholding.