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What is an EIN number, why you need one, and how to get one

Wednesday, November 12, 2014

The importance of EINs for small businesses

There are a lot of boxes you have to check as you’re building your small business or startup. From setting up your business to hiring employees to paying taxes, these steps are essential to getting your business off the ground and running successfully. One of the essential functions of setting up a small business is registering for an EIN. Not familiar? Well, in this article, we’re going to look at what an EIN is, why you need one, and the process of obtaining one. First, let’s define an EIN.

What’s an EIN?

If you’re starting a business, it can be challenging to keep track of all the steps you need to do to get it up and running. One of the most important steps is to get an Employer Identification Number, or EIN. Sometimes also called a Federal Tax Identification Number, this is a nine-digit number that the Internal Revenue Service issues to your business to identify it for tax purposes. Your business will use this unique number in various ways—not only when you file business taxes, but also to perform other business functions, like applying for a business bank account or taking out a business loan.

One way to think of this number is that it’s your business’s equivalent to a Social Security number (SSN). Personally, you’ll use your SSN for many different reasons, but it’s a way to confirm your identity with the IRS. In the same way, your business’s EIN helps identify it as a unique entity. Now that you know about EINs let’s walk through which types of businesses need EINs.

Who needs an EIN?

You might be wondering, "Does my business need an EIN?" Any business can benefit from an EIN, but the IRS requires certain businesses to have an EIN. For other companies, it can be optional. Businesses that meet the following criteria need to have an EIN:

  • Has employees (including household employees)
  • Operates as a corporation or partnership
  • Has a Keogh plan (a tax-deferred pension plan)
  • Administers an estate or trust
  • Files tax returns for employment, excise, or alcohol, tobacco and firearms
  • Withholds taxes on income paid to a non-resident alien
  • Is involved with non-profit organizations, farmers' cooperatives, real estate mortgage investment conduits, or plan administrators

As you can see, many businesses would fall into one of these requirements and will need an EIN. However, one business entity is not mentioned on this list, and that’s a self-employed individual who does not have employees. If you file taxes as a sole proprietorship or a single-member LLC, you’re not required by the IRS to have an EIN. However, an EIN can still help you. Instead of filling out forms like Form W-4, W-9 and 1099s with your social security number, you’ll be able to use your EIN.

An EIN is often a requirement to help you secure a business bank account or a business loan. It can also be required to apply for a business credit card or a business license. Because you can use your EIN instead of your social security number, it can also protect you from fraud. And it can help protect your finances, allowing you to keep your business information separate from your personal information.

Now that you’ve seen the requirements for what types of businesses need an EIN let’s cover how to obtain one.

How do I get an EIN?

As a small business owner, the process to obtain an EIN is easier than you think. First, it’s important to note that obtaining an EIN is free. As long as the applicant has a Social Security number or other taxpayer identification number (like an ITIN), any business in the US or US territories can qualify. It’s also important to know that the person who submits the EIN application doesn't need to be the business owner. The IRS allows this applicant to be any “responsible party,” which means anyone who manages the company’s finances.

If you’re the one applying, you’ll need to have a few documents on hand to complete the application process.

To start, make sure you have the following:

  • Business details, such as your business name and address
  • The name of the principal owner or controller of the business
  • Taxpayer identification number (TIN) of the responsible party
  • Type of entity (sole proprietor, partnership, corporation, etc.)
  • Date the business started or was acquired
  • The highest number of employees expected in the next 12 months
  • Reason for applying for an EIN
  • Principal activity or line of merchandise for the business
  • Whether or not the entity has applied for an EIN before

Then, you have a few ways to submit your application: Online using the IRS website, by filling out IRS Form SS-4, Application for Employer Identification Number and mailing or faxing this form, by phone, or with the help of a qualified accountant. For those who want an EIN immediately, submitting online is the fastest way to obtain an EIN. After you complete the online application form and your information gets verified, the IRS will issue you an EIN immediately. And once you receive it, you can start using your EIN.

As we mentioned earlier, obtaining an EIN is free, regardless of how you apply for one. So be wary of companies who try to charge you to get one. Instead, it’s best to go directly to the IRS’ website and complete the application.

While most businesses don’t have to change their EIN, some circumstances dictate that you may have to get a new one. Let’s look at those instances.

Will I ever need to change my EIN?

While needing to change your EIN is relatively uncommon, there are a few common circumstances in which your business will need to apply for a new EIN:

  • A sole proprietor incorporates or takes on a new partner
  • A sole proprietor or partnership buys or inherits a business
  • A corporation is created after a merger
  • A corporation receives a new charter from the secretary of state
  • A corporation changes to a partnership or sole proprietorship
  • A partnership is dissolved

However, there are other circumstances in which a new EIN is NOT required:

  • The business changes its name
  • Your business location changes
  • You run several businesses
  • A corporate reorganization only changes the identity or business location
  • If you're a division of a corporation

What if I lose my EIN?

Because you’ll use your EIN for lots of legal documents, it’s important to store this number in a safe place. However, if you lose or misplace it, don’t panic. You’re able to look up your EIN in a few different ways:

  • Check your email for the notification you received when your EIN was created
  • Contact your bank if you’ve used it to open up a business account, as they should be able to retrieve it
  • Check your previously filed tax returns
  • Contact the IRS directly through the Business & Specialty Tax Line during business hours

What do I need to pay state taxes?

While an EIN will help you pay federal taxes, there could be additional requirements for your business regarding state taxes. While some states don’t require your business to pay state taxes, others require your business to have a state tax ID number. The best way to know if you’ll need a state tax ID number is to check with your state.

The two most common forms of state taxes for small businesses are income taxes and employment taxes. While you’ll be required to pay these taxes at the federal level, the state laws regarding them can, again, vary by state.

If your state does require a state tax ID number, you can expect the process to be similar to obtaining an EIN, although it will vary by state. Again, the best procedure is to contact your state directly to get the most up to date information.

As you’ve seen, an EIN is necessary for most small businesses. And while it’s a requirement if your business fits the criteria, the process can be an easy one. But as you’ve seen, even if the IRS doesn’t require your business to get an EIN, there are many benefits to having one— including increased protection from personal identity theft and the ability to open a business bank account. After reading this article, you should be able to check “Get an EIN” off your business’s to-do list.

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