An Employer Identification Number (EIN) is a unique number that allows the Internal Revenue Service (IRS) to identify a business for the purposes of tax reporting. Getting your EIN is free, and it is an important step in forming a business. Here, we will tell you everything you need to know about getting an EIN and the importance of having one.
What is an EIN Number?
An EIN is also known as a Federal Tax ID and a Tax Identification Number (TIN). Your EIN is used for tax purposes by the IRS, and it can also play an important role in your business' ability to get funding. The EIN is essentially a Social Security Number (SSN) for a business. You can use the EIN when applying for business loans and lines of credit, and it will allow you to build credit for your business. A business can have its own credit score separate from yours, but first you need an EIN to begin building credit for your business.
Why Do I Need an EIN for My Business?
An EIN serves many purposes. If you intend to hire employees, you need an EIN for tax records. The EIN is actually one of the first things listed on an employee’s W-2 when tax season rolls around. It is necessary to have one for any tax reporting.
You also need an EIN when opening a bank account under your business’ name. This is a good idea because it keeps your personal funds separate from your business’ funds. If you are applying for local permits and licenses, like a liquor license, for example, you need to do so under your business’ name, and you need to use your EIN to do it.
If you are applying for any business credit, you need to use your EIN for that too. Building up your business credit can give your business access to better funding and loan terms than you can get using your personal information. This applies to small business loans, credit cards, and lines of credit for your small business.
When Should I Get an EIN / When Does the IRS Require One?
If you have employees, the IRS will require you to have an EIN. If your business withholds taxes for non-wage income that is paid to a nonresident alien you will need one. The IRS also requires some sole proprietors to have an EIN. LLCs, partnerships, corporations, nonprofit organizations, and trusts and estates are all required to have one.
Often banks will require you to have an EIN to open a business account with them. If you plan to apply for any loans or lines of credit for your small business, you should also have an EIN. This allows you to fully separate your personal credit from your business credit.
Do You Need an EIN to File Taxes?
Most companies are required to have an EIN to file their taxes. However, if you are a sole proprietor, you might not need to; it depends on if you have employees. You must have an EIN before you can hire employees. The EIN goes on their W-2 forms which they need in order to file their taxes. You, as the employer, have specific employment tax responsibilities and forms that you must file. These all require your business to have an EIN.
Who Needs a Federal Employer Identification Number?
LLCs: If your business is a Limited Liability Company (LLC) with more than one member, you need to have an EIN. If you are an LLC with only a single owner, you are only required to have an EIN if you are hiring employees. However, it is recommended to use your EIN to open a business bank account.
Partnerships: A partnership, which is a business owned by at least two people, is required to have an EIN.
Corporations: A corporation is a business that is owned by shareholders and run by a board of directors. If your company is a corporation, you are required to have an EIN.
Nonprofit Organizations: If your business is a nonprofit organization, you will need an EIN for tax reporting purposes.
Trusts and Estates: Sometimes, a trust or estate needs to have an EIN, but these are on a case-by-case basis.
Do You Need an EIN for a Sole Proprietorship?
Sometimes a sole proprietor needs an EIN. A sole proprietor needs an EIN if they:
- Have employees.
- Have a Solo 401(k) or Keogh retirement plan.
- Bought or inherited an already existing business, and they are now operating as the sole proprietor.
- Form a partnership or LLC or become a corporation.
- File for bankruptcy.
Some banks will require you to have an EIN to set up a bank account for your business, even if you are a sole proprietor who does not meet any of the circumstances listed above. It is also helpful to have an EIN to apply for any loans for your business or credit cards; this will keep your finances separate from your business’, so your personal credit may not impact your business’ eligibility for loans and other funding. Plus, if your business grows and you decide to hire employees, already having your EIN will make it easier on you. Having an EIN for your sole proprietorship is also helpful to protect your privacy rather than using your Social Security Number.
Should I Legally Register My Business Before Getting an EIN?
Before applying for an EIN your organization (whether for profit, or non-profit) must be an established business entity. So if you plan for your business to be anything other than a sole proprietorship, you should legally register your business prior to applying for your employee identification number. That’s because when you apply for your EIN you will be required to provide the date of your business formation along with the legal business name which must be approved by the Secretary of State where the business will be operating.
For example, if you get your EIN first and then register your business and your registration is rejected because that name has already been registered in your state you will have to cancel your initial EIN. Next you’ll need to refile your business registration and then apply for a new EIN. It is better to wait until your business formation is complete before applying for an employee identification number.
How Do I Get an EIN Number for My Business?
Getting an EIN for your business is a fairly straightforward process. The easiest way to apply for your EIN is to visit the IRS website and fill out the online IRS Application for Employer Identification Number. You can also fill out the IRS Form SS-4 and print and mail or fax your application to the IRS directly.
Completing the IRS EIN Application (IRS Form SS-4)
It helps to be prepared before filling out the application since the required information may take a bit of preparation to gather. To complete the application you will need to:
- Answer questions about the business and its owners, including:
- Legal name of the business
- Business address
- Type of business entity
- State where your business is incorporated
- Reason for applying for an EIN
- Date the business was started or acquired
- Closing month of your business accounting year
- Number of employees expected in the next 12 months (if any)
- First date wages or annuities were paid
- Category of business
- Type of products, services, or merchandise your business provides
- Assign a responsible party to the application. This person’s information must be included on the application.
How Long Does an EIN Application Take?
Set aside at least 30 minutes to fill out the application. Be prepared and have all your information ready as you will need to complete the online version in one sitting. It will not allow you to save and return, and the application will expire after 15 minutes of inactivity.
When Will I Get my EIN Number?
According to the IRS website, you will get your EIN immediately upon verification of your application. If you have any additional questions about how to apply for an EIN the IRS website has detailed instructions on how to register.
How Much Does it Cost to Get an EIN Number?
Getting an EIN for your business does not cost any money. It is a free service offered by the IRS for businesses. You can apply via mail or fax, but the easiest way to apply for an EIN is using their online application.
Does an EIN expire?
EINs do not expire, but if the owner of the company changes, or the business changes its structure (for example, goes from being a sole proprietorship to a corporation or partnership, or vice versa) you will need a new one. A business may need a new EIN if the owner of the business dies, and the company is now controlled by their estate.
If you change your business name, you do not always need a new EIN, but you will want to check the IRS business name change policies to determine what actions (if any) you need to take. If you decide to close your business you must also cancel your EIN and close your business IRS account.
Getting an EIN is important and is a big step toward establishing and growing your business. Whether or not your business is required to obtain an EIN, it is still a good idea to get one because it can allow you to access better opportunities and funding for the company.
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