Form W-9 and TINs, Part 1
Someone recently asked me why so many accountants and tax pros — CPAs, EAs, etc. — tell single-member LLCs to enter the LLC’s EIN on a W-9 instead of the owner’s Social Security Number.
Now, you might read that paragraph and wonder, “What are we even talking about here?” So, let’s start by breaking it down.
Single-Member LLCs
A single-member LLC is an LLC with one owner. By default, such LLCs are taxed as “disregarded entities.”
Interpret “disregarded entity” literally — you disregard (i.e., ignore) the entity (i.e. the LLC) for (most) tax purposes. See the footnote at the end for the few times where the LLC is not ignored for tax purposes.
For most tax purposes, you ignore the existence of the LLC — and that includes income taxes, and thus 1099s.
A single-member LLC with a human as an owner is taxed as a sole proprietor, by default. For 1099 purposes, this means your 1099 needs to go to the proprietor.
(Footnote: sometimes, a disregarded entity is not disregarded. For example, the LLC itself is liable for employment taxes and certain excise taxes. This is irrelevant to the discussion of issuing 1099s, though.)
Beneficial Owner
I have written about this before, so I’ll be brief here. In the 1099 world, the term “beneficial owner” means the party who will report the income off the 1099 on an income tax return.
With disregarded entities, the beneficial owner is the owner of the LLC, because they’re the one who reports the income off the 1099 on a tax return.
Example: you pay $5,000 for the services of That Guy, an independent contractor. That Guy has formed an LLC called IT Superheroes, LLC. This is a disregarded entity. You’re paying the LLC, but That Guy is the beneficial owner of the LLC’s income. He reports this on his personal tax return.
From this example, we have a key takeaway for today: the 1099 you issue needs to be in That Guy’s name and his taxpayer identification number.
And this is where the problems with disregarded entity LLCs always set in.
More in the next part.