My post on Wednesday about what EIN to put on Schedule C for a single-member LLC taxed as a sole proprietorship generated a lot of comments and feedback from readers.
To recap: the IRS says the Schedule C should show an EIN only if the proprietor has an EIN in his or her name personally. If the proprietorship is a one-person LLC taxed as a sole proprietorship, the IRS says you should not put the LLC’s EIN on the Schedule C. Indeed, the IRS’s instructions to Schedule C put it in bold lettering that you should not put use the LLC’s EIN on Schedule C.
The IRS’s position raises questions. The most-prominent question is: what if the LLC gets a 1099 in the LLC’s name and using the LLC’s EIN? How will the IRS’s computers match up the income from that 1099 if the Schedule C doesn’t show the LLC’s EIN?
Joe the Window Washer operates his business as a one-person LLC. Joe’s LLC has an EIN but Joe himself does not have an EIN. Joe receives a 1099 in the LLC’s name and EIN. How will the IRS’s computers react when Joe (properly, according to IRS instructions) doesn’t put the LLC’s EIN on his Schedule C? Won’t that kick out some sort of matching error because the IRS’s computers will think the LLC’s income wasn’t reported?
Form W-9 Ties Into This
Let’s dig a little deeper, by going to the instructions for Form W-9. This form is given by contractors to the people paying them, so the people know who to issue the 1099 to.
The instructions to Form W-9 say the following about single-member LLCs taxed as sole proprietorships (my emphasis added in bold):
If you are a single-member LLC that is disregarded as an entity separate from its owner, enter the owner’s SSN (or EIN, if the owner has one). Do not enter the disregarded entity’s EIN.
So theoretically, a 1099 should never be issued in the LLC’s name or EIN.
In the Real World
I and all the tax preparers and accountants out there reading this know that the following statement I’m about to make is true: most of the time, a Form W-9 for a one-person LLC taxed as a sole proprietorship will show the LLC’s EIN. Like, probably 80+% of the time.
So, What to Do
My position is this: since the instructions to Schedule C say not to show the LLC’s EIN, the Schedule C should be filled out according to those instructions. Report the income of the entity properly and be prepared to reply to any letters that may come from the IRS.
And, since this topic came up, I have started contacting all of my one-person LLCs so I can review their Form W-9 to make sure the form is showing the correct identification numbers.