S-corp owner with a K-1 and payroll
An S corporation owner who takes a reasonable W-2 salary and a K-1. The heart of it: the K-1 ordinary income is not subject to self-employment tax, and QBI is figured on the K-1 income.
Taxpayer facts
Who this is and what their year looked like.
Aaron is single and the sole owner and employee of Riverstone Marketing Inc., an S corporation in Reno, Nevada. The S-corp files its own return (Form 1120-S); this practice return is Aaron's personal 1040.
From the company he receives a W-2 for his salary and a Schedule K-1 for his share of the profit. He also took some cash distributions during the year and made a few estimated tax payments.
- NameAaron D. Feldman
- Date of birth09/22/1985
- SSN412-88-3067
- Age (as of 12/31/2025)40
- Filing statusSingle
- DependentsNone
- OccupationOwner, marketing agency (S corporation)
- BusinessRiverstone Marketing Inc.: 100% shareholder-employee, S corporation
- How he got the stockOriginal shareholder: he formed the corporation and has owned all of it since
- Address755 W Moana Ln, Reno, NV 89509
- ResidencyNevada, full year (no state income tax)
- Stock basis$60,000 in Riverstone stock at 1/1/2025 (original shareholder; no shareholder loans)
- 2025 estimated tax payments$11,000 (federal), $2,750 paid on each due date
- 2024 total tax$17,500 (2024 AGI $150,000)
Source documents
Work from these the way you would a real client's paperwork. Everything is fictional.
Objectives
What a correct return should capture.
- Understand the structure: the S corporation files Form 1120-S and issues the owner BOTH a W-2 (salary) and a Schedule K-1 (share of profit).
- Report the W-2 wages on the 1040 as usual; payroll tax was already handled on the paychecks.
- The K-1 box 1 ordinary business income flows through Schedule E, Part II to Schedule 1, then to the 1040. It is NOT subject to self-employment tax: the defining S-corp advantage.
- Reasonable compensation: an owner-employee must pay a reasonable W-2 salary; you can't zero it out to dodge payroll tax.
- Cash distributions (K-1 box 16, code D) are not taxed a second time; they reduce stock basis. Figure year-end stock basis from the starting basis on Form 7203.
- Take the QBI deduction on Form 8995: 20% of the K-1 qualified business income, limited to 20% of taxable income before QBI. Check taxable income against the 2025 single threshold ($197,300) to see whether the wage limit applies. Note QBI is based on the K-1 income, not the W-2 wages.
- Because the K-1 income had no withholding, estimated payments matter: apply the W-2 withholding and the estimated payments to find the refund or balance due.
- Note that Nevada has no state income tax.
Check your work
The answer key and the complete return, the way a real client receives it: the 1040 and its schedules, the workpapers behind every number, and the signature forms.
Stuck? Work through it with Yehuda
A one-on-one, 30-minute tutoring session on this return with Yehuda Tenenbaum, EA. Bring the spot where you got stuck and we will work through it together: how the forms connect, why a figure lands where it does, and how to check your work. $250. This is education on the practice return, not advice on your own taxes.