Does a Disregarded Entity Get a 1099?

Many business owners, especially new entrepreneurs, find tax reporting requirements for different business structures confusing. The “disregarded entity” often raises questions about issuing and receiving Form 1099. While a business may have a distinct legal identity for operations, its federal income tax treatment can differ, impacting how payments are reported to the Internal Revenue Service (IRS). This distinction is particularly relevant for 1099 forms, which document certain income paid to non-employees.

Understanding Disregarded Entities

A disregarded entity is a business structure that the IRS “disregards” or ignores as a separate taxable entity from its owner for federal income tax purposes. This means the entity itself does not pay federal income taxes directly. Instead, the business’s income and expenses are reported on the owner’s personal tax return. The most common example of a disregarded entity is a single-member Limited Liability Company (LLC) that has not elected to be taxed as a corporation.

For an individual owner, the business activities of a single-member LLC are typically reported on Schedule C (Profit or Loss from Business) of their Form 1040. This is similar to how a sole proprietorship reports its income and expenses. If the single-member LLC is owned by a corporation or partnership, the LLC’s financial activities are reflected on the owner’s federal tax return as a division of that larger entity. This “flow-through” characteristic simplifies federal income tax reporting, as profits and losses pass directly to the owner without a separate business income tax return for the entity.

Receiving 1099 Forms

When a disregarded entity provides services or earns income requiring a Form 1099, the form must be issued to the owner of the disregarded entity. This is because the IRS views the income as belonging to the owner for federal income tax purposes. The 1099 form should therefore use the owner’s legal name and their Taxpayer Identification Number (TIN).

For instance, if a single-member LLC performs services for a client and receives $600 or more, the client must issue a Form 1099-NEC (Nonemployee Compensation) listing the individual owner’s name and TIN. Using the disregarded entity’s name or EIN on a received 1099 can lead to discrepancies with IRS records and potential processing delays or penalties.

Issuing 1099 Forms

When a disregarded entity, acting as a payer, makes payments to independent contractors, landlords, or others that require 1099 reporting, Taxpayer Identification Number (TIN) is important. For most payments requiring a Form 1099, such as nonemployee compensation reported on Form 1099-NEC, the disregarded entity typically uses its owner’s name and TIN as the payer on the form.

An exception arises if the disregarded entity has employees. In this scenario, the disregarded entity must obtain its own Employer Identification Number (EIN). This EIN is used for reporting and paying employment taxes, such as those reported on Form 941 and Form 940. The entity’s EIN is also required if it is subject to certain excise taxes. For federal employment tax purposes, the disregarded entity is treated as a separate entity.

Even when a disregarded entity has its own EIN for payroll or excise tax purposes, the owner’s TIN is still used for other 1099 reporting, such as Form 1099-NEC. The IRS views the disregarded entity as an extension of the owner for income tax reporting, including most 1099 payments made by the entity. This ensures income and expenses are correctly attributed to the owner, aligning with the “flow-through” nature of these entities.

Using Taxpayer Identification Numbers

Applying Taxpayer Identification Numbers (TINs) is fundamental for disregarded entities in 1099 reporting. For federal income tax purposes, including most 1099 forms received or issued, the owner’s TIN is the primary identifier. Individual owners use their Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN), while corporate or partnership owners use their Employer Identification Number (EIN). When a disregarded entity fills out a Form W-9 to provide its information to a payer, the owner’s name should be on Line 1, and the disregarded entity’s name on Line 2.

An Employer Identification Number (EIN) is necessary for a disregarded entity in specific situations. If the disregarded entity must obtain an EIN to report and pay employment taxes. If the entity is obligated to file excise tax returns, it must secure its own EIN for those filings. In these cases, the EIN identifies the entity for employment and excise tax liabilities, treating it as a separate entity for these limited purposes.

To determine which TIN to use, consider the purpose of the reporting. For income tax-related filings, including most 1099s, the owner’s TIN is generally appropriate. If the activity involves payroll, such as withholding and remitting taxes for employees, or specific excise taxes, the disregarded entity’s own EIN is required. This dual approach ensures compliance with different IRS reporting requirements while maintaining the disregarded status for overall income tax purposes.