An Overview of What Sole Proprietors Need to Know About EINs

As a sole proprietor, you are not required to have an Employer Identification Number (EIN) if you do not have any employees. You can use your Social Security Number (SSN) for tax purposes instead. But there are a few reasons why you might want to consider obtaining an EIN as a sole proprietor. In this guide, we will cover everything sole proprietors need to know about EINs. 

What’s an EIN?

An Employer Identification Number (EIN) is a nine-digit number that the Internal Revenue Service (IRS) assigns to businesses for tax filing and reporting purposes. It is also referred to as a Federal Tax Identification Number. Sole proprietorships, or businesses owned and operated by one person, may need an EIN if they hire employees, open a business bank account, or file taxes other than income taxes. An EIN is also required if the sole proprietor wants to apply for credit or loans in the name of the business.

Benefits of Having an EIN for Your Business

Having an EIN (Employer Identification Number) is beneficial for sole proprietors who are looking to start their own business. An EIN allows them to open a business bank account, hire employees, file taxes, and more. It can also help protect their personal assets from any legal issues that may arise from their business operations. 

Additionally, having an EIN can help sole proprietors build a credit score for their business and make it easier to apply for loans or other financial services. Understanding the benefits of having an EIN is essential for any sole proprietor who is looking to start or expand their business.

Here are the most significant benefits:

Legitimacy

An EIN gives your business a sense of legitimacy and credibility. It shows that you are a registered business with the government, which can be important when dealing with customers, suppliers, or lenders.

Tax purposes

An EIN is necessary for most businesses to file federal and state taxes. It allows the IRS to identify your business and track your tax payments and filings.

Related Reading: How Your Business Structure Impacts Your Taxes

Opening bank accounts

Many banks require an EIN to open a business bank account. This helps to keep your personal finances separate from your business finances, which is important for accounting purposes.

Hiring employees

If you plan to hire employees, you will need an EIN to report employment taxes to the IRS and pay taxes on behalf of your employees.

Obtaining business credit

Some lenders may require an EIN when applying for a business loan or credit card. This allows them to check your business's credit history and financial stability.

Legal protection

An EIN can help protect your personal assets from any legal action taken against your business. This is because the EIN is associated with the business, not with you personally.

When do you need an EIN?

Now that you understand what an EIN is and what the benefits are, here are some reasons you would need an EIN.

Hiring employees

If you hire employees, you are required to have an EIN to report employment taxes to the IRS. If you plan to hire employees, you will need an EIN to identify your business for tax purposes. This includes part-time and full-time employees.

Opening a business bank account

Many banks require an EIN to open a business bank account, even if you are a sole proprietor.

Applying for business credit

Some lenders may require an EIN to establish business credit.

Forming an LLC: If you decide to form a Limited Liability Company (LLC), you will need to obtain an EIN.

Related Reading: What is the Difference Between an LLC and a Sole Proprietorship?

You file certain tax forms

You may need an EIN if you file certain tax forms, such as Form 1099-MISC to report payments made to independent contractors.

You have a Keogh plan

If you have a Keogh plan, which is a retirement plan for self-employed individuals, you will need an EIN to identify the plan for tax purposes.

You are required to withhold taxes on income

If you are required to withhold taxes on income, such as backup withholding, you will need an EIN to identify your business for tax purposes.

You are involved in certain types of organizations: 

If you are involved in certain types of organizations, such as trusts, estates, non-profit organizations, or partnerships, you may need an EIN to identify your business for tax purposes.

How to Obtain an EIN

Applying for an employer identification number (EIN) is a necessary step for sole proprietors who need to open business bank accounts, hire employees, or file taxes. 

Obtaining an EIN is a straightforward process that can be completed online or by mail. This guide will provide an overview of the application process and help you understand how to obtain your EIN as a sole proprietor.

Even if you are not required to have an EIN, obtaining one can provide several benefits, such as establishing a separate identity for your business and protecting your SSN from potential identity theft. 

You can apply for an EIN for free from the IRS website, and the process is relatively straightforward.

You can obtain an Employer Identification Number (EIN) from the Internal Revenue Service (IRS) by following these steps:

Step #1: Determine your eligibility: To obtain an EIN, you must have a valid taxpayer identification number, such as a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). You must also have a business or reason for applying for an EIN.

Step #2: Choose your application method: There are several ways to apply for an EIN, including online, by mail, by fax, or by phone.

Step #3: Complete the application: The application form will require information about your business, such as your business name and address, type of business, and the reason for applying for an EIN.

Step #4: Submit the application: Once you have completed the application form, submit it to the IRS using the method you have chosen. If you apply online, you will receive your EIN immediately upon completion of the application. If you apply by mail, fax, or phone, it may take several weeks to receive your EIN.

It's essential to note that there is no fee to obtain an EIN, and you should only apply for one through the official IRS website or by using official IRS forms. 

Be wary of third-party websites that charge a fee to obtain an EIN on your behalf, as these services are unnecessary.