Tax Identification

An employee identification number is a 9-digit number that is easy and free to obtain from the Internal Revenue Service. (Credit: Persnickety Prints on Unsplash) Are you familiar with the acronym EIN? This stands for employer identification number — a federal tax ID issued by the IRS to uniquely identify employer tax accounts. There are many ways having an EIN benefits a business. Before we dive into the multiple uses for an EIN, however, let’s take a closer look at how EINs are formatted and how they differ from other popular identification numbers like TINs and ITINs. How are EINs formatted? EINs are issued by the IRS to identify a business entity. An EIN’s format is a 9-digit number. It may be used in lieu of a social security number (SSN) on legal paperwork to identify the business. Why would you use an EIN instead of an SSN? Good question. The formatting of an EIN is a little less sensitive than that of an SSN. As a federal tax ID, EINs act as a safeguard. If you are concerned about personal identity theft, you may consider using an EIN on official documents to protect your personal information. What’s the difference between an EIN and other commonly used identification numbers? It can be difficult to initially figure out the differences between various identification numbers. We know what an EIN does, but what about a TIN and ITIN? How does an EIN differ from these two terms? Taxpayer Identification Number (TIN): This identification number, according to the IRS, is used in administration of tax laws. It may be issued by the IRS or the Social Security Administration (SSA). Numbers that may be considered to be TINs include social security numbers (SSNs), employer identification numbers (EINs), individual taxpayer identification numbers (ITINs), taxpayer identification numbers for pending U.S. adoptions (ATINs), and preparer taxpayer identification numbers (PTINs). A TIN must be furnished on tax returns and statements. Individual Taxpayer Identification Number (ITIN): Let’s say that you are a U.S. resident or nonresident alien who needs to file a U.S. tax return. You must be able to file using a federal tax ID. However, you do not have an SSN and may not be eligible for one. If this is the case, you would need to apply for an ITIN using Form W-7. Much like an SSN or EIN, an ITIN is also a nine-digit number but the primary formatting difference is that it begins with the number “9.” Which entities should use an EIN? Are there specific entity formations that absolutely must have an EIN? Most entities, including limited liability companies (LLCs) and corporations, that have hired employees are required to file for EINs. This is because an EIN is a filing requirement for any incorporated business that hires or plans to hire employees. However, there are a few entities that are exempt from these rules. Let’s use the example of a single member LLC. Only one owner, or member, may run a single member LLC. This LLC is classified as a disregarded entity because it does not have employees or excise tax liability. As such, there isn’t a requirement to file for an EIN. The single member LLC may instead use the member’s SSN for information returns and reporting related to income tax. In the past, it was not required for C Corporations to obtain EINs either. However, that has changed thanks to updated tax laws. C Corporations are now required to file for EINs and have this identifier in order to operate their business and stay in compliance. Why do businesses need to obtain an EIN? One of the most common reasons why incorporated businesses file for EINs is for hiring purposes. They may be planning to hire employees and obtaining an EIN is required so the Internal Revenue Service may track the business and ensure it remains in compliance. Where else does a business need an EIN? If you’re planning to do any of the following for your small business, you will need to file for an employer identification number. Opening a business bank account. Most banks require that you have proof of obtaining an EIN before you may open a bank account under the company’s name. Establishing a credit profile. Remember: this would be the business credit profile. As such, it is considered to be a separate profile from the entity’s owners (members). Creating a pension, profit sharing, or retirement plan. Filing employment, excise, alcohol, tobacco, or firearm taxes. Changing your organization formation. Let’s say you decide to switch entity formations, such as from a sole proprietor to an LLC, later on for your business. It’s necessary to have an EIN due to changes in the organization’s ownership. What should I know about filing for an EIN? You understand what an EIN is and its formatting, how it differs from other identification numbers, and what an EIN may do to benefit your business. Is there anything you should know before you apply for an EIN? Make sure your business is eligible to file: Eligible businesses must be located in the United States or U.S. territories. You will need a valid taxpayer identification number. This may be your SSN or an ITIN. The business must be legally formed as a business entity. Once you have checked these items off the list, it’s easy and free to obtain an EIN. Simply head to the IRS’s site and complete the process online, or download the form and send it in. Or, check with your accountant or use a trusted professional service. Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.

Tax Identification

What’s an EIN and Why Does My Small Business Need One?

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Tax Identification

What’s an EIN and Why Does My Small Business Need One?

The Story Exchange

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