When a sole proprietor has an employer identification number (EIN), it would seem to be common sense that the proprietor would put that EIN on the Schedule C for the proprietorship.
Not so fast — especially if the sole proprietorship is a single-member LLC taxed as a sole proprietorship.
Here’s what the instructions to Schedule C say:
If you are the sole owner of an LLC that is not treated as a separate entity for federal income tax purposes, you may have an EIN that was issued to the LLC (in the LLC’s legal name) if you are required to file employment tax returns and certain excise tax returns. However, you should enter on line D only the EIN issued to you and in your name as a sole proprietor. If you do not have such an EIN, leave line D blank. Do not enter on line D the EIN issued to the LLC.
From the instructions to Schedule C. The bolded part is actually bolded by the IRS in the instructions.
So if the proprietor has an EIN in his or her name, that EIN would go on the Schedule C. If the proprietor doesn’t have an EIN, the EIN line is left blank.
If the proprietorship is a one-person LLC, and the LLC has an EIN, the EIN line is left blank because that EIN belongs to the entity, not to the proprietor … even though the entity and the proprietor are treated as the same thing for federal tax purposes.
Example 1:
Joe the Window Washer is a sole proprietor. He does not have an LLC. However, he does have an EIN in his name personally. Joe will put this EIN on his Schedule C.
Example 2:
Joe the Window Washer is a sole proprietor who operates Joe the Window Washer, LLC. The LLC has an EIN but Joe himself does not. Joe will leave the EIN line blank on his Schedule C.
Full Disclosure — I’ve Done This Wrong Myself
I’ve made this mistake before, in putting an LLC’s EIN on Schedule C when I shouldn’t have. This was a few years ago now. The client never received a notice from the IRS, so it appears that nothing disastrous happens when you put an LLC’s EIN on Schedule C. Still, it’s technically not right and proper.
So if the In-The-Name-Of-The LLC EIN does not go on the sole prop’s Sch C but it receives a 1099-MISC, how will the IRS’ matching program find the return that includes the 1099? Nothing will be a match. In your personal example, you didn’t receive an IRS notice, but let’s say your business received a 1099 and you didn’t include the EIN on Sch C as you explain is the correct procedure, what would the IRS do?
Jackie – that’s a really good question. From a purely technical standpoint, the instructions to Form W-9 state that a disregarded entity LLC taxed a sole prop SHOULD NOT put the LLC’s EIN on the W-9, it should put the proprietor’s personal tax ID # (SSN or the proprietor’s EIN).
In practice, I would say nearly 100% of W-9s will show the tax ID # of the LLC rather than of the proprietor.
This is very helpful info Jason. I too have put an LLC’s EIN on Sch C. One would think the IRS would like that info to cross-reference 1099-MISC and 941 data to the Sch C.
David – you are right. The instructions to Form W-9 say an LLC taxed as a sole prop should not put the LLC’s EIN on the W-9; instead, the W-9 should show the proprietor’s personal tax ID # (SSN or EIN of the proprietor himself). In practice, we all know that literally 100% of the time, the W-9 will show the LLC’s EIN. I should do a follow-up blog post on the W-9 issue.
I am writing a follow-up post to this one, going into more detail about what the instructions to Form W-9 say on this topic. That post will appear on Friday.