How to fill W-9 for LLC owned by spouses in a community property state

[Victor21]

Other posts have clarified that when spouses own an LLC, it is considered Partnership and W-9 needs to be filled as such. However, such LLCs are considered disregarded entities if the owners reside in community property state such as CA or WA. In such cases, LLC taxes are part of joint returns of the spouses (LLC doesn't file separate return). How should W-9 for such an LLC be completed: Line 1 one or both spouses and Line 3 as Individual/Single member LLC? 

[AliciaP1]

Yes, married LLC's in community property states can be considered a disregarded entity which marks the box in line 3 for Individual/Single member LLC.  If your business has a name, not a dba, you should enter it on line 1 if you're going to use it on your Schedule C and use the business' EIN in Part I.  Since you are an LLC, this should apply to you.  

Per the IRS:

If there is a qualified entity owned by a husband and wife as community property owners, and they treat the entity as a:

• Disregarded entity for federal tax purposes, the Internal Revenue Service will accept the position that the entity is disregarded for federal tax purposes.
• Partnership for federal tax purposes, the Internal Revenue Service will accept the position that the entity is partnership for federal tax purposes.

A change in the reporting position will be treated for federal tax purposes as a conversion of the entity.

A business entity is a qualified entity if;

1. The business entity is wholly owned by a husband and wife as community property under the laws of a state, a foreign country, or possession of the United States;
2. No person other than one or both spouses would be considered an owner for federal tax purposes; and
3. The business entity is not treated as a corporation under IRC §301.7701-2.

Note: If an LLC is owned by husband and wife in a non-community property state, the LLC should file as a partnership. LLCs owned by a husband and wife are not eligible to be "qualified joint ventures" (which can elect not be treated as partnerships) because they are state law entities.

[Edited 01/26/2023 | 10:41 AM PST]

[Victor21]

Thanks @AliciaP1 - Line 1 cannot be left empty (it says so on the form) and must contain a name. For single member LLC, it is the owner's name. So for my case (LLC owned by spouses in a community property state) should I enter one spouse name or both spouse names?

[AliciaP1]

I apologize, I typed that sentence incorrectly.  I will edit the post, but this is the correct information.  

If your business has a name, not a dba, you should enter it on line 1 if you're going to use it on your Schedule C and use the business' EIN in Part I.  Since you are an LLC, this should apply to you.  

[Victor21]

@AliciaP1 Your last response covers the case when LLC is filing taxes as a corporation. My question is different - the LLC is owned by spouses in a community property state and as such this LLC is treated as a disregarded entity and doesn't file taxes on its own, the taxes are part of individual returns (filed jointly by spouses). The question really then is should the line 1 contain a single name (one of the spouses) or both names.

Line 1: I am inclined to think that give the form allows only one social security number to be entered, the name on line 1 should also be just one person (either spouse).

Line 3 : Check the box "Individual/Sole proprietor or single-member LLC  [Even though this LLC is neither sole proprietor nor single-member, for tax purposes it is treated as one]

[KrisD15 · Accepted solution]

It sounds like it is a  "Sole Proprietorship" even though you share it with your spouse. If you file Schedule C, the IRS considers it as a Sole Proprietorship. 

For the W-9, I suggest you use the social security number of the spouse who has the most participation in the business OR you can always file for an EIN (Employer Identification Number) for the business. You can get an EIN even if you have no employees. 

If you live in a Community Property State, you both will need to claim half the income if you decide to file separately. It does not matter how you fill out the W-9.

HOWEVER something you might want to consider if you both participate in the business. 

You have the option to file TWO schedule C's for the one business. 

Why would you want to do this? 

If you file two Schedule C's you can allocate income to the social security accounts of each spouse which WILL affect future Social Security eligibility for you each. 

It would NOT change the fact that you would each be TAXED on half the total income. 

If you wanted to do this, both Schedule C's could be on the same Married Filing Jointly return, or one on each Married Filing Separately return. 

How you report the W-9 still would not matter, if for example, it reports your social security number, you wound simply allocate the spouses portion of income as an expense on your Schedule C and that same amount as income on the spouses Schedule C. 

@Victor21