Many types of businesses must obtain a special tax identification number from the IRS. If you have a business or are self-employed, you need to know:
- What is a business tax ID number?
- Why is obtaining a tax ID number important?
- When are you required to obtain a business tax ID number?
- Should you obtain a business tax ID number even if it’s not required?
- How do you obtain a business tax ID number?
- What is a business tax identification number?
The official name for a business tax identification number is Employer Identification Number—EIN for short. An EIN is a nine-digit number the IRS assigns to businesses for tax filing and reporting purposes. It looks like this: 12-3456789.
You obtain an EIN from the IRS. You should list it on every payment, form, or other document your business files with the IRS. In most states, you also use it for your business’s state tax payments and filings. In effect, an EIN is like a Social Security number for your business.
Why is an EIN important?
The IRS processes hundreds of millions of payments and tax filings each year. You want to make absolutely sure that it properly accounts for all the payments and filings your business makes. The EIN is the main tool the IRS uses to do this. Thus, you want to comply with the IRS rules. This means you use your tax ID number to identify your business whenever you deal with the IRS.
It’s particularly important to obtain an EIN if you expect to hire employees. Without a business tax ID number you won’t be able to withhold taxes from your employees’ pay or send the money to the IRS. Nor file employment tax returns. Not having the tax ID number can result in severe IRS penalties.
When is an EIN is required?
You need to obtain an EIN from the IRS whenever you form a business that is legally separate from yourself. This includes forming a corporation, partnership, or a limited liability company (LLC) with more than one owner. This is so whether or not your business hires any employees. If you start such a business, be sure to obtain a business tax ID number soon after you complete the formation process.
However, the rules differ if you’re a sole proprietor. You are one if you’re running a one-person business and haven’t formed a separate business entity like a corporation or LLC. Most self-employed people are sole proprietors.
The sole proprietor rules also apply to you if you have formed a single-member LLC (SMLLC).
If you’re a sole proprietor or SMLLC owner, you can generally use your Social Security number to identify your business. In other words, you don’t need to obtain a separate tax ID number. But there are some important exceptions to this rule.
If you’re a sole proprietor, you must obtain EIN if you:
- Hire employees
- Buy or inherit an existing business that you operate as a sole proprietorship
- Incorporate your sole proprietor business or form a partnership or multi-member LLC, or
- File for bankruptcy—your bankruptcy estate must obtain an EIN for its tax filings
If you’re the owner of an SMLLC, you must obtain an EIN if you:
- Hire employees
- Add one or more additional members to your SMLLC, or
- Elect to have your SMLLC taxed as a corporation
Should you obtain an EIN if it’s not required?
Millions of sole proprietors and SMLLC owners use their Social Security numbers instead of an EIN and do just fine. However, if you’re a sole proprietor or SMLLC owner, you have the option of obtaining an EIN. This is so even though it is not required by the IRS. Doing so avoids having to use your Social Security number to identify your business.
There are several good reasons to obtain an EIN and use it instead of your Social Security number:
- Avoid identity theft. Theft of taxpayer’s identities is a widespread problem. Identity thieves steal taxpayers’ Social Security numbers. They then use them to file fraudulent tax returns and obtain tax refunds. For this reason, it’s wise to keep your personal Social Security number as private as possible. If you perform services as a sole proprietor or SMLLC for which you’re paid over $600 during the year, you must provide an EIN or Social Security number to your clients or customers. If you fail to do so, your clients must withhold 24 percent of your payments and send the money to the IRS. Getting an EIN allows you to avoid having to provide your Social Security number to clients and other members of the public.
- Help establish independent contractor status. Using an EIN on your tax returns and payments also helps to show that you’re an independent business-person. In other words, it shows that you are an independent contractor and not an employee. This can make you more attractive to prospective clients.
- Banks may require a SMLLC to have an EIN. If you’re a sole proprietor, you can establish a business bank account using your personal social security number. If you’ve formed an SMLLC, some banks may require an EIN to establish a bank account in your LLC’s name. This is not a legal requirement, it is simply a policy that many banks follow—not all do, however.
Obtaining an EIN
Obtaining an EIN is easy and absolutely free. The fastest and easiest way to obtain an EIN is to apply directly through the IRS website. Go to https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online. You fill out an interview-style online application. To apply online, you must have a valid Social Security number or EIN for another business.
As long as you pass the system’s automatic validity checks, you will immediately receive your EIN. Print out a copy of the confirmation notice for your records and begin using your new EIN immediately. However, it will take up to two weeks before your EIN becomes part of the IRS’s permanent records. You must wait until this occurs before you can:
- File an electronic tax return
- Make an electronic payment, or
- Pass an IRS Taxpayer Identification Number (TIN) matching program
If you don’t want to apply online, you can obtain an EIN by completing and filing the IRS EIN application form. This is Form SS-4, Application for Employer Identification Number. This takes longer than applying online.
Most of the information you’ll need to provide to get your EIN is straightforward, such as your business mailing address. Here are some questions in the online application that may give you trouble:
Trade name/doing business as
For sole proprietors, complete this space only if you’re not using your personal name to identify your business to the public. If you’ve formed a business entity like an LLC or corporation, complete it if you’re using a name other than your business legal name to identify your business. Such a name is also called a “dba,” short for doing business as.
What does your business or organization do?
Click the box that best describes the principal activity of your business. Most people will choose “other” and then describe their business in the next page.
Describe your employees
If you expect to hire employees over the next 12 months, you need to list the number you expect to hire. If you’re a sole proprietor, you’re not an employee of your business, so don’t include yourself in this number.
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MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.