LLC Classification W9: Everything You Need to Know
LLC classification W9 can be confusing and employers use a W-9 for financial reporting purposes.3 min read
LLC classification W9 can be confusing. Typically, employers use a W-9 for financial reporting purposes, which includes non-employee income, income from mortgage interest, and determining the cancellation of debt.
Filling out a W9
Filling out the form can be very easy and is similar to filling out a W-4. However, when it comes to a member of an LLC completing it, it can be tricky.
Filling in the correct information prevents issues with the IRS. If you are a member or owner of an LLC and are filling out IRS Form W-9 for the first time, you may have difficulty with the section near the beginning of the W-9.
Here is a guide to help you navigate:
- Go to the part that says “Check appropriate box for federal tax classification.” There you will see the following options: sole proprietor, C Corporation, S Corporation, Partnership, Trust/estate, Limited liability company, and Other.
- If your LLC choose S corporation for its tax status – this is accomplished by filing Form 2553 with the IRS – then your tax status is “S Corporation.” You would then check “Limited Liability Company” box and fill in “S” (for S Corporation) in the blank to the right.
- If your LLC choose C corporation as its tax status – this is accomplished by filing Form 8832 with the IRS – then your tax status is “C corporation.” Similar to above, you would check “Limited Liability Company” box and fill “C” in the blank to the right.
What if your LLC did not file the above-mentioned forms with the IRS? In that instance, the following default rules are applicable to your situation:
- If your LLC is a single-member LLC, then its default tax status becomes a disregarded entity. That is, a disregarded entity is a business considered separate from its owner for legal purposes (e.g. owner has limited liability in a lawsuit) but not for taxation. This means that with respect to taxation, it will be treated as a sole proprietorship that has flow-through taxation.
- To complete this part of the W-9, provide your name in the name block, the LLC’s name in the business name block, the LLC’s physical address in the address block, and then find the box labeled: “Individual/sole proprietor” and check it off.
- If your LLC has two or more owners, then its default tax status becomes “partnership.” If so, you should check LLC box and fill in the blank with P (for Partnership).
- Where the LLC is owned by a business, e.g. a different LLC, the above should be disregarded. It is recommended that you consult with a tax professional like an accountant or tax attorney for further guidance.
LLC Classifications Under a W-9
An LLC can be classified in several ways with respect to federal tax treatment.
- Some require that the LLC members elect tax treatment by filing certain forms with the IRS.
- Other LLCs are classified based on their hypothetical default tax treatment, which, as mentioned, is dependent on the number of LLC members.
This is applicable when an LLC elects to be taxed as an S Corporation. These tax rules are found under Subchapter C of the Internal Revenue Code. The rules require that corporate profits are taxed at the corporate level prior to distribution to the owners. The owner’s earnings will be taxed again, or suffer from double taxation. Double taxation is a problem for many small businesses.
If elected to be taxed as a S Corporation, the rules are similar to C Corporation taxation. The LLC must fill the proper form with the IRS within 75 days of business formation. If the company was formed more than 75 days ago but is switching its tax scheme, it has 75 days from the beginning of the new tax year to file the proper form with the IRS.
Note that S-corporations will file Form 1120S regarding reporting income and expenses.
As mentioned, disregarded entities are companies that for tax purposes do not distinguish between the owner on a personal level what the business is doing. Basically, you are self-employed. If your LLC’s structure is a disregarded entity, do not fill in anything on the LLC classification line; instead, check the “Individual/Sole Proprietor” box.
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