If you own a business, or if you’re considering forming one, chances are good that you’ve heard of a federal tax ID number, also known as an Employer Identification Number (EIN).
We often hear entrepreneurs talk about their confusion regarding an EIN, especially when it comes to what businesses need one, and exactly which business activities an EIN is used for.
The EIN is actually used by a wide variety of businesses, and it fulfills a number of important business activities. In this article, we’ll discuss the many uses of the EIN, as well as talk about who should get one, and how the application process goes. Along the way, we hope to clear up any misconceptions you might have about the federal tax ID number.
What Is an EIN?
A federal tax ID number or Employer Identification Number (EIN) is a nine-digit number that serves as a sort of Social Security number for businesses. EINs are issued by the Internal Revenue Service, and they’re used as a means of identification for business tax purposes.
What Is an EIN Used For?
An EIN has a vast array of uses for most business owners, and in many cases you’ll find that it’s a necessity to run your company the way you want to. For starters, you’ll need to acquire an EIN if you want to hire any employees for your business, and EINs are generally required for anyone who operates a corporation or a partnership as well.
In addition, many banks will require you to obtain an EIN before they’ll let you open a business bank account, and you’ll almost certainly need one to get a business credit card as well. EINs are usually necessary for paying business taxes on the federal, state, and local levels, and you’ll also need one to apply for licenses and/or permits.
While those are the most common reasons to acquire an Employer Identification Number, they’re also used for the following applications:
- Filing an employment tax return, an excise tax return, or an alcohol, tobacco, and firearms tax return
- Withholding taxes on income paid to a non-resident alien
- Having a Keogh tax-deferred pension plan
- Hiring freelancers or contractors
Let’s say you operate a single-member limited liability company, and you somehow don’t need to do any of those things. Even in this scenario, you still might want to get an EIN solely so that you don’t have to use your Social Security number in an official capacity for your business, as the EIN can replace the SSN for any business transaction.
How Do I Get an EIN?
You can easily obtain a federal tax ID number from the Internal Revenue Service, and it’s entirely free of charge to do so. You can apply for an EIN online, by fax, or by mail, and international applicants may also apply via telephone. Obviously, the most popular option is to apply online through the IRS website.
The information you’ll need to acquire an EIN is pretty simple, and it includes the following items:
- The legal name and physical address of your business
- Responsible party’s name and Social Security number (typically your own, or one of your co-owners)
- Number of owners and employees
- Date and location of your business formation
- The nature of your business
There are also plenty of online business service providers that will offer to acquire an EIN on your behalf, and they’re typically not too expensive. However, we generally don’t advise our readers to go this route, because by the time you supply the EIN service with the information they need, you could have just gotten your own from the IRS for free.
When Does a Business Need to Acquire a New EIN?
There are some situations where a business that already has a federal tax ID number needs to get a new one. According to the IRS website, businesses typically need a new EIN whenever they change their ownership or their business entity.
The rules and regulations regarding when a company does or does not need to pursue a new EIN vary by business structure, so if you’re uncertain whether you need one, we recommend that you take a look at the IRS guide called “Do You Need a New EIN?”
Getting an Employer Identification Number (EIN) isn’t a particularly difficult or time-consuming process, but it is vitally important for just about every business entity in America to acquire one. There are many crucial business activities that require an EIN, and it’s highly unlikely that your business will be able to get by without one.
Especially considering that you can get an EIN for free, there’s really no reason to not acquire one, regardless of the nature or structure of your business. So, what are you waiting for? Go get an EIN for your company today!