Disregarded Entity: What It Is and How It's Taxed
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A contractor sends back a W-9 with two names on it, their own and an LLC's, and you're left guessing which taxpayer ID to put on the 1099. The answer runs through one piece of tax plumbing that trips up both sides: the disregarded entity.
Get it right and the 1099 matches the IRS's records. Get it wrong and it bounces.
What "disregarded" actually means
The name sounds dismissive, and that's basically the point. A disregarded entity is a business the IRS looks straight through for income tax, as if it weren't separate from its owner at all.
The usual case is a single-member LLC. By default, the IRS treats a one-owner LLC as "an entity disregarded as separate from its owner." The LLC is real for state law and for liability protection, but for federal income tax it isn't a separate taxpayer. Its income is the owner's income.
One business for liability. The same person for tax.
That split is the whole idea. The owner gets the legal shield of an LLC without a second layer of tax return or a separate corporate tax.
How a disregarded entity is taxed
Because the IRS ignores the entity, the tax lands entirely on the owner, and where it lands depends on who the owner is.
An individual who owns a single-member LLC reports its activity on Schedule C with their personal return, the same way a sole proprietor would. The profit flows into their income, and they pay income tax plus self-employment tax of 15.3% on the net earnings, made up of 12.4% for Social Security up to the annual wage base and 2.9% for Medicare, uncapped. If the owner is itself a corporation, the LLC's activity folds into that corporation's return instead.
There's neither an entity-level federal income tax nor a separate business return for the disregarded LLC. That simplicity is the reason the structure is so common among freelancers and one-person consultancies.
Whose name and TIN go on the W-9 and 1099
This is the line that generates mismatched 1099s, so it's worth stating plainly.
For income tax and information reporting, a disregarded entity uses the owner's name and the owner's SSN or EIN. The IRS is explicit: a disregarded single-member LLC "should provide the owner's SSN or EIN, not the LLC's EIN" on the W-9. The LLC's name can go on the business-name line of the form, but the taxpayer ID that drives the match is the owner's.
Tax | Whose name and TIN |
|---|---|
Income tax and 1099 reporting | The owner's name and SSN or EIN |
Employment taxes | The LLC's own name and EIN |
Certain excise taxes | The LLC's own name and EIN |
So if you're the one filing the 1099, look at the W-9 and report the owner's taxpayer ID. If you're the contractor, fill the W-9 the same way, or expect a mismatch notice and the backup withholding that can follow. The mechanics of collecting and checking that form sit in our guide to the W-9 for businesses.
When it stops being disregarded
A disregarded entity isn't a permanent state. It changes the moment the owner elects otherwise or a second owner appears.
File Form 8832 and a single-member LLC can elect to be taxed as a corporation, at which point it files its own return and uses its own EIN for income tax too. Add a second member and the LLC becomes a partnership by default, filing Form 1065. And as the table above shows, even while it stays disregarded for income tax, the LLC steps back into its own identity for employment and certain excise taxes, using its own EIN there. These are different questions from how you classify the people the business pays, which we cover in 1099 vs W-2 classification, and, for the odd middle case, in statutory employee.
Disregarded entity vs the alternatives
A single-member LLC can be taxed several ways, and "disregarded" is only the default. The practical differences:
Structure | Separate return? | Income tax | Self-employment tax |
|---|---|---|---|
Disregarded single-member LLC | Owner's return only | On owner's Schedule C | Owner pays 15.3% on net earnings |
LLC taxed as S-corp (election) | Yes, Form 1120-S (elect via Form 2553) | Passes through to owner | Payroll tax on salary only, not on distributions |
LLC taxed as C-corp (election) | Yes, Form 1120 | Taxed at the entity, then on dividends | Not applicable |
The S-corp election is why some contractors move off the default once profits grow: it can trim the self-employment tax, at the cost of payroll and a separate return. Below a certain income, the disregarded default is simpler and cheaper.
Paying a contractor who runs through an LLC
For a business paying contractors, the disregarded entity mostly matters at one moment: making sure the 1099 carries the owner's taxpayer ID, so it matches.
The payment itself is unaffected by the structure, including when it's crypto. You pay the agreed amount, in dollars or in stablecoins, and record it against the owner's tax identity for the 1099. If you pay a roster of 1099 contractors, many of them one-person LLCs, the work is keeping each payment tied to the right taxpayer, which is the record VaultNow builds on the payout side.
Paying contractors who invoice through LLCs, some in dollars and some in USDT or USDC? VaultNow keeps the payout and the payee's details on one ledger, so the amounts and the taxpayer IDs line up when the 1099s go out.
Frequently asked questions
What is a disregarded entity?
A disregarded entity is a business the IRS treats as part of its owner for federal income tax, rather than as a separate taxpayer. The usual example is a single-member LLC, which the IRS disregards as separate from its owner by default. The entity is still real for liability and state law; it just lacks a separate income tax identity.
How is a disregarded entity taxed?
The owner reports the entity's income on their own return. An individual owner uses Schedule C and pays income tax plus 15.3% self-employment tax on the net earnings. There's neither a separate federal income tax return for the disregarded LLC nor an entity-level income tax. If the owner is a corporation, the activity folds into that corporation's return.
Whose EIN does a disregarded entity use on a W-9?
For income tax and 1099 reporting, a disregarded single-member LLC uses the owner's name and the owner's SSN or EIN, not the LLC's EIN. The LLC name can appear on the business-name line, but the taxpayer ID reported is the owner's. For employment and certain excise taxes, the LLC uses its own name and EIN.
Is a single-member LLC a disregarded entity?
By default, yes. A single-member LLC is treated as a disregarded entity for federal income tax unless it files Form 8832 to elect corporate treatment. Adding a second member turns it into a partnership for tax. So "single-member LLC" and "disregarded entity" overlap, but the LLC can choose a different tax status.
Disregarded entity vs S-corp: which is better?
It depends on profit. The disregarded default is simpler and cheaper to run, with the owner paying self-employment tax on all net earnings. An S-corp election can reduce self-employment tax by splitting pay into a reasonable salary and distributions, but it adds payroll, a separate return, and more admin. The crossover usually comes once profits are high enough to justify the overhead.
This is general information, not tax or legal advice. Entity classification and tax treatment turn on the specific facts and change over time; confirm your situation with a qualified tax professional. Positions stated are as of 2026 and based on IRS guidance for single-member LLCs and Form W-9.