Indiana Composite Return: Withholding, Schedule IN K-1, and Penalties

An Indiana composite return is the vehicle a partnership, S corporation, trust, or estate uses to report and pay Indiana income tax on behalf of its nonresident owners. Filing it is mandatory under Indiana Code 6-3-4-12 and 6-3-4-13 whenever the entity has nonresident owners receiving Indiana-source income.¹ The entity withholds Indiana adjusted gross income tax at 2.95% from each nonresident owner’s share of Indiana-source income and remits it to the Department of Revenue.²

The statute uses “shall.” The entity is liable to the state for the withheld amount, whether or not it actually distributes cash to the owner.³

Which Nonresident Owners Belong on the Return

The default rule is inclusion: every nonresident partner, shareholder, or beneficiary receiving a distributive share of Indiana-source income goes on the composite return. In exchange, those owners are generally relieved of the obligation to file their own Indiana individual return, so long as the pass-through distribution is their only Indiana income.¹

Three situations fall outside that default:

An owner with other Indiana-source income — rental property, a sole proprietorship, wages from an Indiana employer — must still file Form IT-40PNR reporting all Indiana income, including what already appeared on the composite return.⁴
A publicly traded partnership under IRC Section 7704 is exempt from withholding and composite filing if it agrees to file an annual information return identifying each unit holder.³
Reciprocity with Kentucky, Michigan, Ohio, Pennsylvania, and Wisconsin covers only wages, salaries, tips, and commissions. Distributive share income is not reciprocal, so a resident of those states with partnership income from Indiana still appears on the composite return.⁵

Forms and Deadlines

There is no separate composite return form. The entity files Schedule Composite (State Form 49188) as an attachment to its regular return: Form IT-20S for S corporations, Form IT-65 for partnerships, or Form IT-41 for trusts and estates.⁶ Each nonresident owner’s Indiana tax is computed separately on that schedule.¹

The return is due on the 15th day of the fourth month after the close of the tax year, which is April 15 for calendar-year filers.⁷ A federal extension automatically gives Indiana one additional month past the federal extension’s expiration. Entities without a federal extension can request an Indiana-specific extension before the original due date; if granted, it mirrors the federal length plus a month.⁸ Extensions cover filing, not payment. Estimated tax remains due by the original deadline.

Withholding Rate and Remittance Schedule

The 2026 rate is 2.95% of each nonresident owner’s Indiana-source distributive share.² Withholding is calculated on the distributive share itself, not on cash actually paid, so a partnership that retains earnings still owes the tax.

Remittances go to the Department of Revenue electronically. If aggregate monthly withholding exceeds $50, the entity remits monthly, by the 30th of the following month. If the total stays below $50 per month, filing and remittance shift to a quarterly schedule the department prescribes. The withheld money becomes state property the moment it is deducted from the owner’s share; the entity holds it in trust and should treat it as a payable rather than available cash.³

The County Tax Trap

County withholding is the part many entities miss. As a general rule, county income tax withholding is not required for nonresident owners on a composite return. The exception matters: if a nonresident owner’s principal place of employment or self-employment sits in an Indiana county as of January 1, the entity must withhold that county’s income tax for that owner.¹

When even one nonresident owner triggers county tax, the entity must file Schedule Composite regardless of whether other rules would have required it. Any nonresident owner owing county tax also has to file Form IT-40PNR individually to report the county liability. Rates differ across Indiana’s 92 counties, so getting the correct county and rate identified at the start of the year is a compliance step, not a bookkeeping detail.

Schedule IN K-1 to Each Owner

The entity must furnish each nonresident owner a Schedule IN K-1 (State Form 49181) no later than the 15th day of the third month after the tax year ends. The K-1 reports the owner’s share of Indiana adjusted gross income, any state modifications, and the state and county tax withheld.⁹ Copies of every K-1 go with the entity return filed with the department.

Owners need the K-1 in two situations: to document withholding already paid if they also have to file an IT-40PNR, and to claim a credit for taxes paid to Indiana on their home state return. Indiana accepts the K-1 or an equivalent information statement as proof of tax paid to another jurisdiction, and an entity filing composite returns in multiple states can attach a supplemental breakdown by state.¹⁰

Penalties for Getting It Wrong

Indiana’s penalty structure on composite obligations is heavier than many entities expect, and the penalties stack.

Failure to withhold the required amount under IC 6-3-4-12 or 6-3-4-13 carries a penalty of 20% of the tax that should have been withheld, on top of any other penalties that apply.¹¹
Late payment or underpayment of tax shown on a return, or a deficiency the department later determines, triggers a 10% penalty on the unpaid amount, with a $5 minimum.¹¹

Interest also accrues on unpaid balances, currently 2% above the applicable rate and compounding until paid. Between the 20% failure-to-withhold penalty and the 10% late-payment penalty, an entity that ignores its composite obligations can face effective penalties of 30% or more before interest.

Records to Keep for Audit

The Department of Revenue can audit composite returns and correct mathematical errors on filed returns.¹² The entity bears the burden of substantiating every figure on the schedule.

Keep documentation of each nonresident owner’s residency status, their share of Indiana-source income, the state and county withholding calculations, and copies of every Schedule IN K-1 issued. If a nonresident owner was excluded from the composite return because they had other Indiana-source income, keep a record of that determination and the reasoning behind it. Where records cannot support the return, the department can assess additional tax, and the penalty rules above apply to any deficiency found.

1
Indiana Department of Revenue. Income Tax Information Bulletin 72 – S Corporation, Trust, and Partnership Mandate to File a Composite Return on Behalf of Nonresident Shareholders and Partners
2
Indiana Department of Revenue. How to Compute Withholding for State and County Income Tax
3
Indiana General Assembly. Indiana Code 6-3-4-12
4
Indiana Department of Revenue. IT-40PNR Part-Year and Full-Year Nonresident Individual Income Tax Booklet
5
Indiana Department of Revenue. Individual Income Tax Overview
6
Indiana Department of Revenue. Current Year Corporate/Partnership Tax Forms
7
Indiana Department of Revenue. IT-20S S Corporation Income Tax Booklet
8
Indiana Department of Revenue. Extension of Time to File Indiana Corporation Income Tax Returns
9
Indiana Department of Revenue. IT-20S / IT-65 Schedule IN K-1
10
Indiana Department of Revenue. Income Tax Information Bulletin 28
11
Indiana Department of Revenue. Fines, Fees and Penalties
12
Indiana General Assembly. Indiana Code 6-8.1-4-2 – Audit and Special Tax Divisions; Powers and Duties