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If you’re self-employed, what’s a disregarded entity?

A “disregarded entity” is an important tax status for self-employed sole-proprietors.

In a nutshell, it means you can form a LLC for your business, but — provided you’re the company’s only employee — you can file your taxes under your own social security number. That’s because single-member LLCs can choose to be treated either as a corporation or a disregarded entity, the latter of which the IRS treats like a sole proprietorship.

watercolor-dream-do-live-love-art (1)What this means for you: If you qualify, you can simplify your taxes by not having to file business taxes separately. All of your company’s profits or losses will be reported along with your personal 1040.

Please note that this is not tax advice or legal advice, but only information of a general nature. Please seek the assistance of a qualified professional for any business questions or concerns you may have.

In the words of the IRS (see here):

For federal income tax purposes, a single-member LLC classified as a disregarded entity generally must use the owner’s social security number (SSN) or EIN for all information returns and reporting related to income tax. For example, if a disregarded entity LLC that is owned by an individual is required to provide a Form W-9, Request for Taxpayer Identification Number and Certification, the W-9 should provide the owner’s SSN or EIN, not the LLC’s EIN.

However, for certain Employment Tax and Excise Tax requirements discussed below, the EIN of the LLC must be used instead. Therefore, an LLC will need an EIN if it has any employees or if it will be required to file any of the excise tax forms listed below. Thus, most new single-member LLCs classified as disregarded entities will need to obtain an EIN. An LLC applies for an EIN by filing Form SS-4, Application for Employer Identification Number. See Form SS-4 for information on applying for an EIN.

A single-member LLC that is a disregarded entity that does not have employees and does not have an excise tax liability does not need an EIN. It should use the name and TIN of the single member owner for federal tax purposes. However, if a single-member LLC, whose taxable income and loss will be reported by the single member owner, nevertheless needs an EIN to open a bank account or if state tax law requires the single-member LLC to have a federal EIN, then the LLC can apply for and obtain an EIN.

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