Does a Disregarded Entity File a Tax Return?
Learn how tax filing works for disregarded entities, including when a separate return may be required and how federal and state rules apply.
A disregarded entity is a business structure the IRS does not treat as separate from its owner for tax purposes. This classification determines how income and expenses are reported and can create confusion about whether a separate tax return is necessary.
Understanding when a disregarded entity must file a tax return depends on federal requirements, state regulations, and specific circumstances like employment taxes.
Default Entity Status for Single-Member LLCs
A single-member LLC is automatically classified as a disregarded entity unless the owner elects to have it taxed as an S corporation or C corporation. In this default status, the business does not file a separate federal income tax return. Instead, its financial activity is reported on the owner’s individual tax return.
For sole proprietors, this means filing Schedule C (Profit or Loss from Business) with Form 1040. Business revenue, expenses, and net profit are reported here, directly affecting the owner’s taxable income. If the business incurs a loss, it can offset other income, potentially reducing overall tax liability.
Since the IRS does not recognize the LLC as separate from its owner, the owner is responsible for all tax obligations, including self-employment taxes on net earnings. These taxes, covering Social Security and Medicare contributions, are reported on Schedule SE of Form 1040. Unlike corporations, which face double taxation, a disregarded entity allows profits to pass directly to the owner without an additional business-level tax. This structure provides liability protection without the complexity of corporate tax filings.
Federal Tax Form Requirements
A disregarded entity does not file its own federal income tax return. Instead, all financial activity is reported on the owner’s individual return using Schedule C.
However, if the business has employees, it must file payroll tax forms, including Form 941 (Employer’s Quarterly Federal Tax Return) or Form 944 (Annual Federal Tax Return) for smaller businesses. Employers must also file Form 940 for Federal Unemployment Tax Act (FUTA) payments.
Businesses subject to excise taxes—such as those related to fuel, alcohol, or environmental fees—must file the appropriate forms, such as Form 720 (Quarterly Federal Excise Tax Return). While the entity itself is disregarded for income tax purposes, these obligations remain.
When a Separate Filing May Be Necessary
Although a disregarded entity typically does not file a separate federal income tax return, certain situations require distinct filings.
One common scenario is when the owner elects to have the LLC taxed as an S corporation or C corporation. Filing Form 2553 elects S corporation status, while Form 8832 elects C corporation status. Once this election is made, the business must file its own tax return—Form 1120 for C corporations or Form 1120-S for S corporations. This change introduces corporate tax obligations, including estimated tax payments and potential dividend reporting.
A separate filing is also required when a disregarded entity is owned by a foreign person or entity. In this case, the LLC must file Form 5472 along with a pro forma Form 1120 to disclose transactions between the U.S. entity and its foreign owner. Failure to file Form 5472 carries a penalty of $25,000 per violation.
Some states do not recognize disregarded entity status and require LLCs to file their own state tax returns. For example, California imposes an annual LLC tax of $800 and requires Form 568, while Texas levies a franchise tax based on revenue. These state-specific requirements vary, making it essential for business owners to check local tax laws.
Employer Identification Number Usage
A disregarded entity may need an Employer Identification Number (EIN) even though it is not considered separate from its owner for tax purposes. If the business has employees, an EIN is required for payroll tax reporting, including filing W-2s and submitting quarterly payroll tax returns.
Even without employees, an EIN may be necessary for opening a business bank account, applying for certain licenses, or dealing with financial institutions that prefer not to process transactions under a Social Security Number (SSN). Businesses that file excise tax returns or issue Form 1099-MISC to independent contractors must also use an EIN.
State-Level Filing Obligations
While the IRS disregards the entity for federal tax purposes, state tax authorities may have different rules. Some states follow the federal classification, while others impose taxes, fees, or filing requirements regardless of federal treatment.
California requires disregarded entities to pay an annual LLC tax of $800, even if they generate no income. Businesses earning over $250,000 must also pay a gross receipts-based LLC fee. Texas and Tennessee impose franchise taxes, with Texas using a margin-based calculation. New York requires an annual filing fee for single-member LLCs, based on gross income. Some states, such as Massachusetts and Illinois, mandate annual reports and associated fees, even if no income tax return is required.
Business owners must review state-specific requirements to ensure compliance and avoid penalties.