What Is an Employer Identification Number (EIN)?
An Employer Identification Number (EIN), also known as a federal tax ID number, is a unique nine-digit number assigned by the Internal Revenue Service (IRS) to business entities operating in the United States.
The EIN is used to identify a business for tax reporting purposes and is essential for various business activities, such as opening a business bank account, filing tax returns, and applying for business licenses.
Most business entities need an EIN, including corporations, partnerships, and even sole proprietorships with employees. The number is used by the IRS to track their tax obligations and filings. It’s important for businesses to apply for an EIN immediately after formation to ensure compliance with federal tax requirements. Getting an EIN is a free service provided by the IRS, which can be completed online, by fax, or mail using Form SS-4.
Do I Need an Employee Identification Number?
Whether you need an Employer Identification Number (EIN) depends largely on the specifics of your business. Here are some scenarios in which you would need to apply for an EIN:
- You Have Employees: Any business with employees is required to have an EIN for tax purposes.
- Your Business is a Corporation or Partnership: Corporations and partnerships generally require an EIN, regardless of whether they have employees.
- You File Employment, Excise, or Alcohol, Tobacco, and Firearms Taxes: Businesses involved in areas that require these types of federal tax filings must obtain an EIN.
- You Withhold Taxes on Income Paid to a Non-Resident Alien: Any business that does this will need an EIN.
- You Have a Keogh Plan: A Keogh plan is a tax-deferred pension plan available to self-employed individuals or unincorporated businesses for retirement purposes. Having such a plan necessitates an EIN.
- Your Business is Involved in Organizations such as Trusts, Estates, Real Estate Mortgage Investment Conduits, Non-Profit Organizations, Farmers’ Cooperatives, or Plan Administrators.
Sole proprietors without employees and those who don’t file any excise or pension plan tax returns may use their Social Security Number (SSN) in place of an EIN.
However, obtaining an EIN may still be beneficial as it can help protect against identity theft and enhances the professional image of the business. It also makes it easier to keep business and personal finances separate, which is beneficial for tax and legal reasons.
How to Get an Employer Identification Number
Getting an Employer Identification Number (EIN) is a straightforward process that can be completed in several ways. Here’s how you can apply for an EIN:
1. Apply Online
The quickest and preferred method to receive an EIN is through the IRS’s online application process. It is available to all entities whose principal business, office, or agency, or legal residence (in the case of an individual), is located in the United States or U.S. Territories. The online application is immediate, and you can receive your EIN promptly after completing the application.
- Visit the IRS website and access the EIN Assistant to start the online application process.
- Ensure you complete the application in one session; it cannot be saved. The session will expire after 15 minutes of inactivity.
2. Apply by Fax
You can fax a completed Form SS-4 to the appropriate fax number (you can find this number on the IRS website or by calling the IRS). If you provide a return fax number, the IRS will send back your EIN within four business days.
3. Apply by Mail
The processing time for an EIN application by mail is longer. Complete the Form SS-4 and mail it to the IRS at the address provided for your location on the IRS website. It can take up to four weeks to receive your EIN this way.
4. Apply by Telephone – International Applicants
International applicants may apply for an EIN by calling the IRS at 267-941-1099 (not a toll-free number). This method is available from 6:00 am to 11:00 pm (Eastern Time) Monday through Friday. The person making the call must be authorized to receive the EIN and answer questions concerning the Form SS-4.
Required Information
To apply for an EIN, you’ll need to provide specific details about your business, including:
- The name and address of the business
- The name and SSN, ITIN, or EIN of the principal officer, general partner, grantor, owner, or trustor
- Type of business entity (e.g., sole proprietorship, partnership, corporation)
- Reason for applying (e.g., started a new business, hired employees)
- Date the business was started or acquired
- Number of employees expected to be hired in the next 12 months
- The highest number of employees expected monthly
- First date wages or annuities were paid
- Principal activity of the business
Important Tips
- Ensure that the name on your EIN application matches the name on your social security card or another identification document.
- Decide the responsible party for the business. The IRS requires that the “responsible party” be an individual or existing entity with an SSN, ITIN, or EIN previously issued by the IRS.
By following these steps and preparing the necessary information, you can obtain your EIN smoothly and efficiently.
Benefits of an Employer Identification Number
An Employer Identification Number (EIN) is essential for various administrative and legal aspects of running a business, but it also offers numerous advantages that can aid in the growth and smooth operation of your enterprise. Here are some key benefits of having an EIN:
1. Tax Administration
The primary purpose of an EIN is for tax administration by the IRS. It allows businesses to report their taxes and ensures compliance with federal tax obligations. This number is used for almost all tax forms and submissions, making it crucial for proper tax handling.
2. Business Identity Protection
Using an EIN instead of your Social Security Number (SSN) for business transactions helps protect your personal identity. This separation reduces the risk of identity theft, as the EIN is specifically meant for business-related activities.
3. Business Banking
Most banks require an EIN to open a business bank account. Having a business account is essential for managing finances, enhancing professional credibility, and keeping personal and business finances separate. This separation simplifies accounting and tax reporting.
4. Hiring Employees
An EIN is necessary to hire employees. It is used for setting up payroll and reporting employment taxes to the IRS and state agencies. Without an EIN, you cannot legally pay your employees.
5. Establishing Business Credit
A business can begin to establish its own credit profile through an EIN. This separate credit history is beneficial for obtaining business loans, credit cards, and other financing without affecting the owner’s personal credit.
6. Compliance with IRS Requirements
For certain changes in your business structure, such as incorporating or forming a partnership, an EIN is required. It is a necessary part of the documentation for most legal business registrations.
7. Obtaining Licenses and Permits
Many business licenses and permits require an EIN. This number is used to track the business’s compliance with federal, state, and local regulations.
8. Contracting and Freelancing
Freelancers and independent contractors often need an EIN to work with larger companies that prefer not to use an SSN for contractor payments for security and privacy reasons.
9. Health Insurance
Businesses that offer health insurance to their employees will need an EIN to facilitate this process with insurance companies and government health plans.
10. Retirement Plans
If a business wants to set up a retirement plan, such as a 401(k), for its employees, it needs an EIN. This facilitates the management and reporting of the retirement fund contributions to the relevant bodies.
Overall, an EIN is not just a regulatory requirement; it is a beneficial tool that supports and enhances various business operations, ensuring that your business can grow and operate efficiently while complying with necessary legal and financial obligations.
Employee Identification Number vs. Taxpayer Identification Number (TIN)
An Employer Identification Number (EIN) and a Taxpayer Identification Number (TIN) serve similar purposes in identifying entities for tax and legal purposes, but they are used for different entities and under different circumstances. Understanding the distinctions between these two numbers can help in their proper application and compliance with IRS regulations.
Employer Identification Number (EIN)
- Purpose: An EIN is specifically used to identify business entities and certain other groups (like trusts and estates) that have tax reporting obligations.
- Who Needs It: Corporations, partnerships, nonprofit organizations, sole proprietors with employees, and businesses that must file employment, excise, or firearms taxes require an EIN. It’s also necessary for businesses wanting to open a bank account in the name of the business or establish business credit.
- Issued By: The Internal Revenue Service (IRS).
- Format: Consists of nine digits with the format XX-XXXXXXX.
Taxpayer Identification Number (TIN)
- Purpose: A TIN is a broader category that includes several different forms of identification numbers used to recognize individuals or entities that are required to file tax returns. It is used by the IRS in the administration of tax laws.
- Types: The TIN can be one of several numbers: a Social Security Number (SSN) for individuals, an Employer Identification Number (EIN) for businesses, an Individual Taxpayer Identification Number (ITIN) for residents and non-residents who need to file taxes but aren’t eligible for an SSN, and an Adoption Taxpayer Identification Number (ATIN) for children in the process of adoption.
- Who Needs It: All taxpayers including individuals, businesses, and estates that are required to file tax returns with the IRS.
- Issued By: The IRS, except for the SSN, which is issued by the Social Security Administration.
Key Differences
- Scope: A TIN is a general term that encompasses several types of identification numbers, including the EIN. In contrast, an EIN is specifically for employers and business entities.
- Application: An EIN is used by business entities for activities such as filing taxes, opening bank accounts, and hiring employees. A TIN could be used by individuals (via an SSN or ITIN) to file personal taxes or by businesses (via an EIN).
- Eligibility: SSNs and ITINs are primarily for individuals, while EINs are for business entities. An ATIN is specifically for children being adopted who cannot yet get an SSN.
In summary, while all EINs are a type of TIN, not all TINs are EINs. Each serves a critical function in tax and identity documentation for different groups of taxpayers, and knowing which type of number to use is essential for compliance and proper management of financial obligations.
Does My Business Need an EIN?
Your business needs an EIN if it hires employees, operates as a corporation or partnership, files certain tax returns (employment, excise, or alcohol/tobacco/firearms), or requires a bank account under the business name. Sole proprietors without employees may not need one but can benefit from an EIN to protect personal information and enhance business credibility.
Is an LLC or sole proprietorship required to have a federal tax ID/EIN?
An LLC is required to have an EIN if it has any employees or opts for corporate tax treatment. A sole proprietorship needs an EIN only if it hires employees or needs to file employment or excise tax returns. Both might opt for an EIN to open a business bank account, enhance credibility, or protect the owner’s personal information.
Can I use the same EIN for multiple businesses?
No, each business entity must have its own unique EIN. Using the same EIN for multiple businesses is not allowed as each number is specific to one business for tax, reporting, and identification purposes. If you operate multiple businesses, each must apply for and use a separate EIN.
