Disregarded Entity Definition

What Is a Disregarded Entity in Payroll and Tax

A disregarded entity is a business structure, often a single-member LLC, that is legally separate from its owner but treated as the same entity for tax purposes. The IRS “disregards” the company for federal income tax reporting, meaning profits and losses flow directly to the owner’s personal tax return.

Disregarded Entities in Payroll

Even though a disregarded entity simplifies tax reporting, payroll compliance obligations remain. Employers must still file payroll taxes, issue W-2s or 1099s, and comply with employment laws. For global payroll, disregarded entity rules may differ under local tax regimes.

Advantages and Limitations

Advantages include simplified taxation, reduced paperwork, and operational flexibility. Limitations include limited options for growth, self-employment tax liabilities, and potential confusion with liability protections.