I have a single member LLC- do I really need to give my customers my Social Security Number?
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QuickBooks & 1099 reporting for Sole Member LLCs

 
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ALERT:  Are you preparing the 1099s with the business name and business EIN on the first line of a 1099? 
This is correct w hen the  vendor files the LLC tax return on a partnership tax return or corporation tax return.  When a vendor is a sole proprietor the 1099 first line must contain the first and last name of the taxpayer, and the EIN of the business or SS number of the individual.  Apparently,  for Single Member LLC's who also file their business return on form Schedule C the IRS seems to be insisting that the correct way to complete a 1099 is to use the First and Last name of the Managing Member of the LLC (single owner LLC) and the social security number of the owner. 

We have a problem with the IRS request of using the managing members social security number on the W9 and 1099 forms- so we have taken the time to research all aspects of the IRS matching program and developed a list of Pros and Cons to help you determine your course of action,  so read on!

CONUNDRUM:  What name should be entered on the NAME line of a Form W-9 when the business is an LLC that reports its earnings and expenses to the IRS on Schedule C of form 1040.?  This name is what will appear on the first line of the 1099 Form.

Pick one of these choices- all of them have pitfalls (Read the analysis of choices below)- none of them are palatable, but for now, we have to make a choice:
a. Per Instructions on the W-9 and 1099 one should put their first and last name and social security number on the Tax ID form
b. My last call to the IRS asking for clarification ended up with there saying, "do not provide a W-9 to the Customer, instead give them a
    copy of the 147C letter - a TIN validation.
c. Ignore W9 and 1099 instructions and put your business name and business EIN number
d. Put your first and last name on line one of the 1099 and your business name on line 2 and use the business EIN number
e. Acquire an EIN number under your First and Last name and use that on the W9 form.

Analysis of Choices
a. Who wants to give their customer their social security number? 
    When your customer sees the W-9 completed with a name other than the one they are writing business payments to, 
    what impression does that give of your business? It confuses the customer and could give the impression that you are too small time        
    and using other vendors may prove to be less of a hassle. 

b. Really? The customer asks for a W9 form and instead you provide a 147C letter?  Customer will not be pleased!
    How complicated is a request for a W9?  They now have the impression that you cannot follow a simple request!  
    And should the IRS come a knocking on your customers door and ask to look at the W-9s will they accept a 147C letter?
    Since the instructions on the W-9 and 1099 specifically request a social security number, First and Last name the IRS agent
    completely missed the mark when she offered the 147C letter as a solution. The 147C letter only confirms the name and the
    EIN of the business, nowhere does it mention the owners social security number.

c. Several of my calls to the IRS resulted in the agent recommending to use the business name and EIN on the W-9.
    Of course you will have to sign the W-9 knowing that it contains information that is NOT what the IRS wants.
     It has been our experience having completed W-9s with this option for the last 10 years that our customers have not
     been inconvenienced and have NEVER   received a CP2000 letter (see why it might matter below) . 
     My best guess is that the CP2100  looks for name and EIN match and in fact the business name and
     business EIN do MATCH!   While this seems like the best choice,  you have to sign your name "UNDER PENALTIES
     OF PERJURY"  that it true, complete and correct when in fact it is not completed correctly. 
   
d. Non Matching Name and EIN  may be likely to kick out a CP2100 letter (see why it might matter below).
    However we have been providing First Last Name of owner and the EIN of the business for several years without our
    customers receiving a CP2100. We have yet to hear from customers  that there is a mismatch on a CP2100 notice. 
    As QB advisors we are often asked what needs to be done with the CP2100 notice, and to date any CP2100 notices
    clients have asked us about have not included our name.  When you read the instructions on backup withholding
    it explains the matching process.  See why it matters below.
   
e. We have tried this option as well.  I attempted to complete an SS4 application online, and even tried to call it and request
     a special EIN number for my personal name over the phone.   Since at the time this article was published (9/2013)  the
      W-9 instructions says to use your first and last name  and an EIN number if you have one under that name, 
      I thought I might acquire and maintain  2 EIN numbers for the same business.
      Unfortunately, the instructions  say  DO NOT use your EIN in place of your social security number.
      By completing an SS-4 to acquire an EIN under my personal name  you will be declaring to have a business under your personal name
      and you need to provide details about a business that does not exist.  Your business operates as an LLC, not as a sole proprietorship.
      Nowhere in the instructions and the form can I figure a way to complete it without declaring I have a new business.

Why would it matter later?
:
Section 3406(a) (1) of the Internal Revenue Code provides that the payer shall deduct and withhold 28% income tax from a reportable
1099 payment  if either the payee fails to furnish the payee's Taxpayer Identification or the Secretary of the Treasury notifies the payer on a form
CP2100 or CP2100A that the Taxpayer Identification furnished by the payee is incorrect (2 out of 3 consecutive years). 

Section 6721 provides a payer may be subject to a $50 per 1099 return failure to include a correct payee TIN or $100 intentional disregard per return.
And we NEVER want to subject our customers to a penalty or fine!

The goal of the 1099 reporting system is to help the IRS identify tax returns with underreported income. lf you receive a 1099 with your business name and file the business taxable income under your personal name, the IRS matching system breaks down.   A fix to this entire conundrum would be for the IRS to  modify its database to included a FILING TAXID associated with the EIN number, this new field would allow them to accomplish their goal and allow us to complete the forms with business information.

What is the matching process? The backup withholding publication of the IRS explains the process as follows

" The information returns you file must include a correct Name/TIN combination to allow us to match the information reported against the income included on the payee’s income tax return. We check whether a Name/TIN combination is correct by matching it against a file containing all social security numbers (SSNs) issued by SSA or against a file containing all employer identification numbers (EINs) issued by IRS. Then we compare the name control on the payee document (if provided) to the name control on file. If a name control is not provided, we develop it from the name(s) provided on the first two name lines (up to 40 characters for each name line including spaces) of the information return. If we can match a provided name or a developed
name control
to the name control in our records, we consider it correct. If no match is found using this process, we consider the Name/TIN combination to be incorrect. The chart on the back of Form W-9 has information for payees about “What Name and Number to Give the Requester” of Form W-9

Conclusion?

You need to come to your own conclusion, but we are sticking with choice D on preparing a 1099 and W9 for a sole member LLC based on the matching process described in the backup withhold publication. 

We do need to be careful of where the IRS is headed on this problem. The bottom line is if IRS changes the way it develops the name control, then a CP2100 notice may be issued to your customer.  Your customers could be faced with a potential penalty or the requirement to withhold and submit income tax from payments made to your business.  

Picture the busy customer's accounting department when they receive a CP2100 notice which will not include any penalty or tax due.  They immediately  file it in a folder for their CPA  to read. However, the CPA is not given the folder until sometime next March  of the 2nd taxable year after they have filed 1099s using the same incorrect name and tax id number. When you receive a CP2100 notice 2 years in a row with problem data on the 1099 any future payments to that vendor must contain a  28% withholding income tax.   This spells disaster!  QuickBooks does not have the capability of tracking and reporting withholding taxes on 1099s, your customer wants no part of it and looks for other vendors to provide services!

Below is an example of an accurately prepared 1099 for a LLC business along with screenshots of instructions.

 W9 example for a sole member LLC


EXTRACTED FROM W-9 INSTRUCTION booklet
301.7701-2(c)(2)(iii) Enter the owner's name on the NAME line. The name should NEVER
 be a disregarded entity (a Schedule C filer)
301.7701-3  Do not check the LLC box

Enter the owners social security number. DO NOT enter the disregarded entity's EIN

instructions
                                 for preparing a W9 form for a sole member LLC owner
 continued instructions
                                    on which Tax identification number should be used on form W9 when the business is a sole member LLC who files a schedule
                                      c tax return



Instructions for completing the SS4 form imply that you should not acquire one just to use in place of your social security number.

instructions for applying for a new 
                                 EIN in the hopes of solving the dilema which tax EIN or Social Security number should be reflected on a 1099 and W9 form for a 
                                   sole member LLC who files a schedule C tax return

Instructions for completing the 1099 form  indicate that the social security number is required or if applicable the
EIN ( of what the individual or the LLC- it is not clearly stated here).

1099 instructions as to which name and tax identification number
                                 must be reported on a 1099 form

 

 

Track 1099 information in your QuickBooks File

  1. Get a W-9 Form from every vendor that provides you with a service or for whom you rent property from. This is important- this document will tell you whether the vendor qualifies for exemption from submitting a 1099 and how to report their name (so that it will match the IRS database) on the 1099.  W-9 Form
     
  2. Enter into the Vendor center, under the vendor record, under additional information tab
    that the vendor is eligible for a 1099
    New laws for sending 1099s


 

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Click here to buy online , or call us to order by phone  800-216-0763