What is an EIN and Why Do I Need One?
An employer identification number EIN is a nine-digit number given by the Internal Revenue Service (IRS) to business entities.
For businesses that deal in high volumes of cash, having an EIN can make things much easier when dealing with financial institutions.
It also helps to prevent identity theft and fraud, as each business entity with an EIN is registered with the IRS.
In this article, I will explain in more detail the situations in which you need one, the benefits of getting one, and most importantly, how to obtain one for your business.
Let’s get started.
The following business structures are required to have EINs:
- Limited liability companies
In general, sole proprietorships do not need to have an EIN.
However, if you own a business as a sole proprietorship and the following apply to you, you’ll need an EIN:
- You might need to file for bankruptcy
- If you currently have or want to be able to hire employees
- If you’re thinking of buying or inheriting a business that makes you a sole proprietor
- You’d want to provide solo 401(K) retirement plan as part of your benefits package.
On the flip side, freelancers, independent contractors, entrepreneurs who operate from homes, and people who make a livelihood from the gig economy are typically not required to obtain an EIN.
Even so, there are several compelling reasons why they should get one.
Here are the main benefits to consider if you’re thinking about getting an EIN.
If you are not an entity in the eyes of the IRS, you are not registered with them.
This makes it easier for someone to commit business identity theft by using your personal information to open up credit lines, file taxes, or apply for loans in your personal name – rather than having to use your business name.
An EIN can help prevent this.
Using your EIN instead of your Social Security Number (SSN) creates a barrier between your personal information and your business finances.
This makes it more difficult for criminals to access your personal financial information through your business.
An EIN can add credibility with clients if you’re a freelancer or independent contractor.
It shows that you’re a professional who is serious about your business.
It can also make it easier to get paid since some clients may be hesitant to work with someone who doesn’t have an EIN.
If you’re planning to apply for a small business loan, having an EIN can make the process go more smoothly.
Lenders often require an EIN as part of their loan application process.
Having one ready to go can help you approve your loan more quickly.
If you’re starting a new business, you’ll need to open a business bank account.
Most banks will require that you have an EIN to do this.
A separate business bank account is essential for keeping your personal and business finances separate.
In addition, to using the right tax software, an EIN can also help you track your business expenses more easily when it comes to business tax returns.
As a new business, it can be challenging to build trust with vendors.
But if you have an EIN, vendors will know that you’re a legitimate business.
This can make getting the supplies and resources you need to run your business easier.
If you want to establish business credit, you’ll need an EIN.
Business credit is essential for growing your business.
It can give you access to loans and lines of credit, which can help you finance business expansion.
Having good business credit can also help you get better terms from vendors.
If you’re considering hiring employees as part of your business needs, you must have an EIN.
An EIN is required for businesses that have employees.
It’s used to report employee wages and business taxes.
If you’re a non-U.S. citizen operating as an entrepreneur outside U.S. territories, having an EIN can give you access to more business opportunities in the U.S.
For example, you may need an EIN to open a U.S. bank account, get a credit card, or establish business credit.
Getting an EIN is also necessary if you want to hire employees in the U.S.
While some businesses don’t need an EIN, there are many reasons why getting one can be beneficial.
If you’re starting a new business or thinking about expanding your current business, an EIN can give you the added credibility and flexibility you need to succeed.
“Why can’t I just use my social security number as an EIN?” is a frequently asked question during any EIN discussion.
An EIN provides financial security by separating your personal and business finances and protecting your Social Security Number.
This is especially important for certain types of businesses that require many financial transactions or that work with sensitive information, like healthcare businesses.
The IRS suggests you only utilize your Social Security Number if you have a simple company structure with no workers.
An EIN application is a process that’s both free and relatively simple.
The first step is to determine your business structure.
Once your business structure is in place, you can apply for your EIN in one of three ways:
- Online through the IRS website
- By fax
- By mail
If you apply to get an EIN online, you’ll be able to view and print your EIN immediately.
If you choose to apply mail or fax, you’ll have to fill in Form SS-4, also known as the Application for Employer Identification Number.
The process generally takes four business days if you apply by fax and four weeks if you use by mail.
The cost of an EIN is $0.
You may only have to pay a fee if you use an independent service to help you obtain your EIN.
Independent services are not affiliated with the IRS and will charge a fee for their assistance.
Read the fine print before using one of these services, as some have been known to scam business owners.
When the ownership or structure of a firm has changed, it must obtain a new EIN.
Although changing the legal name of your company does not necessitate the acquisition of a new EIN, you may want to do so to avoid confusion.
Sometimes, you may open a business bank account without an EIN, but it isn’t the best option for your company.
Your EIN is your business’s unique identifier, and it helps you build credibility with vendors, customers, and financial institutions.
It also makes it easier to file taxes and hire employees.
So even though you may be able to open a business bank account without an EIN, I recommend getting one as soon as possible.
You can use your Social Security number instead of an EIN if you have a straightforward business structure and no employees.
I don’t recommend it, though, because it’s not the best way to protect your personal assets or keep your personal and business finances separate.
Yes, you can use your EIN to apply for business credit. It’s one of the most important things you can do to build business credit.
When you use your EIN to apply for credit, lenders will report your payment history to the business credit reporting agencies, which will help you build a strong business credit profile.
An ITIN is a number generated for tax purposes, which is only available to specific non-resident as well as resident aliens, their dependents, and spouses.
It is used when one cannot get a Social Security Number (SSN).
The federal government issues a federal tax identification number instead of the state.
Not only does a federal employer identification number make it easier for the government to keep track of your taxes, but you can also enroll in the electronic federal tax payment system.
Using a federal tax ID number for tax purposes allows you to pay your taxes more quickly over the phone or online.
Organizations that have tax-exempt status are exempt from paying federal taxes.
To qualify for tax-exempt status, an organization must meet specific requirements set forth by the IRS.
Some common examples of tax-exempt organizations are charities, religious organizations, and educational institutions.
Your business licenses and permits will vary depending on your business type, location, and the products or services you offer.
For the responsible party of a sole proprietorship or partnership, you will need to obtain a business license from your city or county clerk’s office.
If your business is located in a city requiring firms to have a separate license, you will also need to acquire one from the city.
You may also need special licenses and permits to sell certain products or services, such as alcohol, firearms, or food.
You can check with your local chamber of commerce or business association to see what licenses and permits are required in your area.
Understanding your EIN and its use is essential for any business owner.
From business owners running non-profit organizations to self-employed, single-member LLCs, your EIN is vital in ensuring your company’s success when it comes time to excise income tax.
Doing your research and knowing the ins and outs of your EIN will help you make the best decisions for your business as you move forward.
This article is for informational purposes and is not intended to be tax or legal advice.
Consult a licensed accountant or attorney to ensure compliance with all federal, state, and local laws.
Further reading on AdamEnfroy.com: Online legal services can help you form your business and obtain the right licenses and permits.
They’ll also be able to help you with any ongoing legal needs, such as trademark registration or business litigation.
In addition, using a registered agent service can help you stay compliant with state filing requirements and avoid missed deadlines.