What is an EIN Number and Does Your Small Business Need One?
If you’re a small business owner, you’ve probably heard of an EIN number but may not know what it is or if your business even needs one.
In this article, we will examine what is an EIN number and discuss whether your business needs one in order to stay compliant with the IRS and other legal requirements. Let’s get started!
What is an EIN Number?
An EIN, also known as an Employer Identification Number, is a nine-digit number assigned exclusively to businesses and organizations by the Internal Revenue Service (IRS) to facilitate tax filing and reporting. It acts as a secure identifier for your business, similar to a social security number for individuals.
Here are some key points about an EIN:
- Issuance: EINs are issued by the IRS to businesses in the United States. To get an EIN, you can apply online through the IRS website, by fax, or by mail. The online application is the quickest method, and you’ll receive your EIN immediately upon completion.
- Necessity: If you have employees, operate a business as a corporation or partnership, or meet certain IRS requirements, you are required to have an EIN. Even some non-profit organizations, trusts, and estates must have EINs.
- Uses: EINs are used for a wide range of business tasks. These include opening business bank accounts, applying for business licenses, filing tax returns, and applying for loans or credit cards under the business name.
- Wage Reporting: Employers are required to include their EIN on all forms related to employee wages, such as W-2 and 1099 forms. This helps the IRS track income and tax obligations.
- Privacy Protection: Using an EIN for business transactions can help protect the business owner’s personal information. Without an EIN, sole proprietors must use their personal Social Security Number, which increases the risk of identity theft.
- Endurance: An EIN is permanent. Once an EIN has been assigned to a business, it will never be reused or reassigned to another business. Even if the business closes or is sold, the EIN will still be associated with that business entity.
- No Cost: There is no cost to apply for an EIN from the IRS. Be wary of websites or services that charge a fee to obtain an EIN.
In summary, an EIN is a critical identifier for businesses in the United States and plays a key role in many aspects of business operations and compliance with the IRS. So it’s important to be aware of the 1099 rules and the importance of filing taxes correctly and to simplify hiring. Obtaining an EIN is quick and easy and you can simply apply online in just a few minutes.
Who Needs an EIN Number?
The Internal Revenue Service requires businesses and organizations to obtain an EIN or federal tax ID number for tax reporting purposes.
However, not all businesses are required to have one. So, who needs an EIN number? Here’s a list of business types that may need an EIN in order to stay compliant with the IRS:
- Sole proprietorships: What is a sole proprietor? Entrepreneurs who own their own business without formally creating a separate legal entity such as a corporation or LLC.
- Partnerships: This category encompasses general partnerships, limited liability partnerships (LLPs), and limited partnerships.
- Corporations: Business entities that are legally separate from their owners, such as C-corps, S-corps, and professional corporations.
- Non-profit organizations: A specialized legal business structure created for charitable, religious, or educational purposes.
- Trusts and Estates: Wealthy individuals usually establish complex legal arrangements for tax or estate planning purposes. A trust or estate must obtain an EIN if they pay taxes, have employees, or operate a business.
When does the IRS require an EIN number?
Any business entity needs to understand when it’s necessary to get an EIN in order to accurately report taxes, properly manage its finances, and comply with IRS regulations. Let’s take a look at when the IRS requires an EIN number…
Sole Proprietorship
As a sole proprietor, you don’t need to obtain an EIN unless you have employees, operate your business as a corporation or partnership, file excise tax returns, or withhold taxes on income paid to a non-resident alien. This includes hiring seasonal employees.
Single-Member LLC
Single-member LLCs are not required to obtain an EIN from the IRS, though it’s a good idea to get one if you plan to open a business bank account or hire employees. Make sure to research what is an LLC to determine if it’s the right business entity for your needs.
Multi-Member LLC or Partnerships
Multi-member LLCs and partnerships must obtain an EIN in most cases. The IRS also requires businesses to obtain a new EIN if there has been a change in the composition of the LLC or partnership that affects its federal tax status.
Corporations
All corporations, including S-corporations and C-corporations, must obtain an EIN in order to file taxes and for other business-related activities.
Non-Profit Organizations
Non-profit organizations are required to obtain an EIN in order to file taxes and other legal documents.
Trusts and Estates
A trust or estate must obtain an EIN if they pay taxes, have employees, or operate a business.
Why Can’t I Just Use My Social Security Number?
Social Security numbers are issued to individuals and are not meant to be used for business or commercial purposes, so the IRS requires businesses to obtain a separate employer identification number (EIN).
Using a social security number for business activities could leave you vulnerable to identity theft since your Social Security Number is sensitive private information.
Using a Social Security Number would also make it difficult to accurately report taxes and other financial information related to your business.
An EIN is considered an official identifier and provides a secure way of managing your business’s finances and complying with IRS regulations.
How to Get an Employer Identification Number
Getting an EIN is free, easy, and can be done quickly online. Here are the simple steps needed to get yourself and EIN:
Step 1: Visit the IRS Website
The first step is to visit the IRS website and start the application process by clicking on the “Apply for an Employer ID Number (EIN)” link.
You’ll need to provide basic information about your business, such as its legal name, structure (sole proprietorship, LLC, etc.), address, and the type of business you’re conducting.
Step 2: Verify Your Identity
The IRS will then ask you to verify your identity by providing a valid driver’s license or other government-issued ID.
You can also provide a copy of your Social Security card if you don’t have a valid driver’s license.
Step 3: Submit Your Application
Once you’ve provided all of the necessary information and verified your identity, submit your application. The IRS will issue you an EIN within minutes.
Step 4: Recieve your EIN and Open a Business Bank Account
Once the IRS has issued your EIN, you can use it to open a business bank account. This is an important step in setting up your business and managing its finances.
International EIN Applicants
As an international applicant, you may need an EIN in order to open a business bank account or file taxes in the U.S.
The application process is similar to that of domestic applicants, but you may need to provide additional documents such as a passport, visa, or alien registration card.
Benefits of Having an EIN
Having an EIN can provide a range of benefits to businesses and other entities. The following are five key benefits of having an EIN:
- Improved credit rating. An EIN can help to establish a business’s credit ratings, making it easier to get loans and leases.
- Separate identity. Having an EIN allows a business or entity to separate its identity from its owner’s personal taxes.
- Deductible expenses. With an EIN, businesses can take advantage of certain tax deductions, such as employee salaries and business equipment purchase costs.
- Open bank accounts. Many banks will require an EIN to open a business account.
- File taxes. An EIN is necessary for filing state and federal taxes each year.
Role of an EIN in Business Loans and Credit
An EIN is often a prerequisite for small businesses seeking loans or lines of credit. Lenders typically require an EIN to process loan applications, as it helps them assess the business’s creditworthiness and financial health. Having an EIN separates your personal and business finances, thereby protecting your personal credit score.
EIN and Business Identity Protection
Using an EIN instead of your Social Security Number (SSN) for business transactions enhances your privacy and reduces the risk of identity theft. It acts as a buffer, ensuring that your SSN is not exposed to various business activities, such as vendor contracts or credit applications.
EIN for International Business Entities
For international entities operating in the U.S., acquiring an EIN is essential. It enables them to adhere to U.S. tax regulations, open bank accounts in the U.S., and facilitate business transactions seamlessly. Although the process for international applicants may require extra documentation, it is typically uncomplicated.
EIN in Organizational Changes
If your business experiences major changes, like transitioning from a sole proprietorship to a corporation, you may require a new EIN. This adjustment represents the new legal entity and helps keep tax records accurate. Consulting with a tax professional is crucial to determine when a new EIN is needed.
Annual Reporting and EIN
An EIN is essential for annual reporting requirements, such as filing business tax returns. It helps the IRS track your business’s tax liabilities and ensures that your filings are accurate. Keeping your EIN information up-to-date is important to avoid any potential issues with the IRS.
Closing a Business and EIN
If you decide to close your business, your EIN will still be associated with the business entity. While the EIN itself cannot be “closed,” you should inform the IRS that your business is no longer operating. This step ensures that your business’s tax obligations are properly concluded.
Are there any disadvantages to having an EIN?
Although obtaining an Employer Identification Number (EIN) offers various advantages for businesses and other organizations, there are also potential downsides to consider.
These include additional administrative costs such as filing fees, the complexity of tracking multiple EINs associated with the entity, and changes made to the company must be reported promptly in order for the EIN to remain valid.
EIN Vs. DUNS Number
It’s important to know what is a DUNS number and how it can be beneficial to a business. An EIN and a DUNS number both provide unique identification numbers to their owners.
However, the two are not interchangeable and serve different purposes, as shown in the table below.
| EIN | D-U-N-S Number |
|---|---|
| In order to obtain an EIN, the IRS requires business information from the responsible party, which is usually based on their social security number or existing EIN. | A D-U-N-S Number will be issued by Dun & Bradstreet once multiple sources confirm a business’s existence |
| The number does not necessarily represent a one-to-one relationship with a business, as any business can have multiple numbers. | Numbers are associated with business entities one-to-one |
| Isn’t required for sole proprietorships or other business entities | Can be assigned to business entities including certain sole proprietorships |
| Changeable, which means that it isn’t consistent or persistent over time | Maintains persistence, consistency, and uniqueness over the lifetime of that entity |
| Tax IDs are for the United States only (other countries have their own tax IDs) | Provides global coverage |
Employee Identification Number vs. Federal Tax Identification Number (TIN)
An Employee Identification Number and an Individual Taxpayer Identification Number (TIN) are different types of unique identification numbers issued by the IRS. Let’s take a look at both in the table below…
| Employee Identification Number | Federal Tax Identification Number (TIN) |
|---|---|
| Employer ID number | General tax ID number |
| A type of TIN | This term can be used to describe a number other than an EIN, such as an SSN, ITIN, ATIN, and PTIN. |
| U.S. residents may use it only for filing their business taxes | Can be used in various ways |
EIN Vs Federal Employee Identification Number (FEIN)
An EIN and Federal Employee Identification Number (FEIN) are both issued by the IRS and provide unique identification numbers to their owners. Let’s take a look at how they’re different in the table below…
| EIN | Federal Employee Identification Number (FEIN) |
|---|---|
| Used to identify employers and sole proprietors who need to report business income or pay employment taxes | Assigned to corporations that have employees or file an employment tax return. |
| Used by certain trusts, estates, nonprofits, and other organizations. | Identifies a given business entity for federal tax reporting purposes |
Do I need an EIN if I’m self-employed?
Yes, even if you’re not formally creating a business entity such as a corporation or LLC, self-employed individuals, or the “responsible party,” as the IRS calls it, you may still need an employer identification number (EIN).
The IRS mandates that all businesses acquire an EIN to ensure accurate reporting of taxes and other financial information pertaining to the business.
It also provides a more secure method for safeguarding your sensitive personal information, as the number is exclusively utilized for your business activities.
Does a DBA need an EIN?
Yes, if you’re starting a business under a Doing Business As (DBA) name, you are required to obtain an Employer Identification Number (EIN) from the Internal Revenue Service.
Using a separate EIN helps protect your personal information since the number is associated with your DBA and not with your Social Security Number.
What is a federal employer identification number?
A Federal Employer Identification Number (FEIN) is a unique nine-digit identification number assigned by the Internal Revenue Service (IRS).
This number is used to identify and track the finances of a business or other entity for tax purposes.
A FEIN is required for many legal transactions, such as filing taxes or opening a business bank account. Having a FEIN also provides businesses with protection from identity theft and fraud.
Do I need an EIN before or after I form my LLC?
Generally, the best time to obtain your EIN and file for tax-exempt status is after you’ve formed your LLC. This way, you have all of the information needed to properly fill out the form and avoid any delays.
After you form your LLC, you can apply for an EIN online or by printing and mailing Form SS-4 to the IRS.
How do I look up my EIN?
Unfortunately, the IRS does not have a public database for looking up EIN numbers. You can find your EIN on the EIN confirmation letter the IRS sent you when your application for the number was approved.
If you do not have this letter, you can also check documents like tax returns or forms filed with the IRS.
If you don’t have access to these documents, you can call the IRS Business & Specialty Tax Line for assistance in finding your EIN at 800-829-4933.
How do I look up another business’s EIN?
Looking up another business’s EIN doesn’t have to be complicated. You can start by simply asking the company directly for their EIN.
Alternatively, if you are looking for a publicly traded company, check out their SEC filings which often contain the necessary information.
Additionally, inquiring with a credit bureau may also provide insight into the business’s EIN.
Lastly, there are numerous paid EIN databases available so you can quickly and easily look up the requested information.
How do I recover my EIN if I forget or lose it?
It’s important to put your EIN confirmation letter in a safe place to avoid losing your EIN in the first place.
However, if you forget or lose your EIN, the process of recovering it is fairly straightforward. You can find your EIN on forms such as tax returns or other forms you filed with the IRS.
If you don’t have those, give the IRS Business & Specialty Tax Line a call and ask them to search for your EIN at 800-829-4933.
Image: Depositphotos
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