Form W-9 and TINs, Part 2
Let’s look at how the IRS uses the information off the 1099s you file. We wrote about this in part 1 of “Dealing with Corrections,” and it’s a good encapsulation.
When you file 1099s with the IRS, they put that information into their databases. In other writings, we delve into “how” they catalogue the information, but here’s the short version. They use the first four characters of the last name or the first four significant letters of the business name, and then the TIN of that person or business.
Their computers then wait for the recipient of that 1099 to file their tax return. The computers are watching, making sure that the recipient reports the income from the 1099.
Here’s an example. If you send a 1099 to That Guy, whose SSN is 999-99-9999, the IRS’s computers will log that as: GUY*999999999. Since Guy only has three characters rather than four, the IRS’s computers will add a “*”.
Beneficial Owners
In Part 1, we covered “beneficial owners.” For 1099 purposes, beneficial owner means who will report the income off the 1099 on a tax return. Here is where we get into the meat of the W-9/LLC/1099 issue.
Let’s say That Guy has formed IT Superheroes, LLC. He is the only owner, and he has not made any election to have his LLC taxed as a corporation. This is a disregarded entity, taxed as a sole proprietorship. In order to open a bank account for the LLC, he had to apply for an EIN for IT Superheroes, and the EIN is 11-1111111.
That Guy will file a Schedule C with his Form 1040 to report all activity relating to IT Superheroes, LLC.
Because this is a disregarded entity, your 1099-NEC reporting should be:
● Line 1: That Guy
● Line 2: IT Superheroes, LLC
● TIN: 999-99-9999 (That Guy’s SSN).
The problem is, much of the time, the W-9 from That Guy will show the EIN of the LLC. This is not proper (we will offer citations in a bit). But it happens a lot.
If you issue a 1099 this way:
● Line 1: That Guy
● Line 2: IT Superheroes, LLC
● TIN: 11-1111111 (IT Superheroes’ EIN)
The IRS will log it as: GUY*111111111. The problem is, this is not his TIN … it’s his LLC’s TIN. The IRS’s computers won’t know that this is his income.
If you issue a 1099 this way:
● Line 1: IT Superheroes, LLC
● TIN: 11-1111111
The IRS’s computers will log it as: ITSU111111111. They’ll be watching for a tax return under this name and TIN combination … and there won’t be one.
This is why the IRS requires the reporting to be under the proprietor’s name and TIN.
Why Can’t They Associate the LLC’s EIN With the Individual?
You might ask: why can’t the IRS simply associate the EIN with the name of the owner? So in our example here, why can’t they associate 11-1111111 (the LLC’s EIN) with That Guy?
This is a good question. But they don’t have a way to associate a disregarded entity’s EIN from the LLC with the name of the owner. So, here we are.