Disregarded Entity

What is Disregarded Entity?

A disregarded entity is a legal business structure that the IRS does not recognise as separate from its owner for federal income tax purposes. The most common example is a single-member limited liability company that has not elected to be taxed as a corporation. In this case, the business’s income and expenses are reported on the owner’s personal tax return.

Why Disregarded Entity Matters

While the entity is disregarded for income tax purposes, it may still be recognised as a separate entity for employment tax and certain excise tax obligations. This distinction is important for HR and payroll teams, as a disregarded entity with employees must obtain its own employer identification number and handle payroll tax reporting independently. Understanding this classification helps organisations structure contractor and employment relationships correctly.