IRS Schedule C with EIN, and California taxes

[russyQ]

I'm a Sole Proprietor and file a Schedule C for my business at the Federal level.

I have a Federal EIN for this business. Partly because I have a Self-Employed 401k, which requires an EIN, and partly for privacy, so that I can give my clients the EIN and not my personal SSN.

On the Schedule C there is a place to enter both SSN and EIN, which I do.

Last week I got a letter from the California Franchise Tax Board saying they had no record of my 2019 tax return and citing unreported income on a 2019 1099-MISC.

I have filed my 2019 CA return and when I sign into MyFTB (the state's tax web platform) it shows that I have filed successfully and, in fact, received a refund.

The 1099-MISC in question was filed by one of my clients against my EIN and not my SSN, so I suspect this is the issue. As far as I am aware, there is no place on the California tax return (540) to specifically add EINs for Sole Proprietor businesses, all those details are just taken from the Federal Schedule C. (I triple-checked that the income they mentioned is correctly on my CA tax return, and it is.)

I replied to the CA FTB, enclosing my entire 2019 return and a letter detailing what I thought the situation is.

Obviously, they haven't read and processed my response yet, as I received the exact same Notice today, but for my 2018 return. It takes me a few hours to compile everything they want in response each time, so it's getting kind of exhausting.

Does anyone else have experience of using a Federal EIN with a Schedule C business and then dealing with California State taxes? Any tips?

[ErnieS0]

California is probably looking for Form 568 and not Form 540 because you have an EIN number that you use for your business.

LLCs that are sole proprietorships (disregarded entities) are required to file Form 568 and pay the minimum $800 annual fee.

Limited Liability Company Tax Booklet

[russyQ]

Thanks, but I’m not an LLC.

[LeonardS]

The problem is due to you receiving business income from your clients who are using your social security number and not your EIN.  The best solution is to ensure that your clients are aware of your EIN and they use it on the tax documents they send to you.  This problem is generic and not tied to any specific tax preparation software.

@russyQ

[russyQ]

Thanks for the reply, Leonard.

Are you saying that if you receive income reported on 1099s that use a mixture of EIN and SSN in a single tax year, then California is unable to reconcile them? You must use entirely one or the other?

[Vanessa A]

No, the state can still match your EIN with your business and your SSN is on your return. However, consistency reduces the chances of issues with the matching so it is always best to use the same number on all of your W-9's and other tax documents.