Just like every US resident (with very few exceptions) must have a Social Security number to be identified and have their job and income tracked by the Government, a business must (usually) have an EIN. That’s the beginning of the answer to the question: “What is an EIN number?” In a nutshell, an EIN is like the SSN counterpart for your enterprise. It stands for Employer Identification Number, and it’s issued by the Internal Revenue Service to separate businesses from one another.
It is also referenced as a FEIN, meaning Federal Employer Identification Number, or your business’ tax ID number. Whatever you call it, an EIN is a unique nine-digit number that serves to identify your business for tax purposes. Most business owners have one, as it’s required to open a business bank account, file business tax returns, and apply for licenses. Knowing the purpose of the EIN number is just the first step, too. Give our guide a read to learn more about the types of businesses that need it, ways of applying and obtaining one, and all the benefits you’ll enjoy once you get it.
Who Needs an EIN?
Depending on your business type, and the IRS’ criteria, you’ll be able to determine whether you need an EIN:
- The first thing to determine is whether your business has employees. If it does, you’ll most definitely need to apply for a business EIN number.
- Having a partnership or multi-member LLCs means that the LLC must file a partnership return together with K-1s to all the members, so an EIN is a must.
- If your business is a C corporation, it’s regarded as a separate entity, and you’ll have to apply for an EIN to report taxes. The same goes for an S corporation – you’ll need your employer identification number to operate legally.
- If your business files excise taxes or withholds them for nonwage income paid to a non-resident alien, you’ll also be required to get an EIN.
- For non-profit business structures, an EIN is also required for tax reporting purposes.
You only need an EIN number for businesses structured as single-member LLCs if you have employees or excise tax liability. The same goes for sole proprietorships – if they don’t have employees nor file excise or pension-plan tax returns, they’re not required to apply for an employer identification number.
How to Apply for an EIN Number
Now that you’ve figured out whether your business entity needs an EIN, let’s walk you through the process of obtaining one. Applying for an employer ID number is straightforward, but if you’re not well-versed in admin, your registered agent can deal with the EIN application instead.
As soon as your business is officially formed – i.e., you got your formation date and legal business name approved by your state – you can start the EIN application process. Don’t forget to check if you have a valid Taxpayer Identification Number (SSN, ITIN, another EIN) before starting. The easiest way to apply is through the IRS EIN Assistant page. Just follow the listed steps by adding the required information to your IRS EIN form; just make sure to do it in one sitting, as the session will expire after 15 minutes of inactivity. You can also file your application by fax or mail.
If your business isn’t incorporated in the United States, you can’t apply for an EIN. On the other hand, if it is, but you’re the one who doesn’t have a legal residence in the US, you can apply for a free EIN via telephone, fax, or mail.
Who Doesn’t Need a Federal Identification Number?
The technical requirements for having a FEIN might not include you: You might be an independent contractor, freelancer, or sole operator. However, while it is correct that you don’t need to have one, you might want to get it anyway. It would be unwise to dismiss the benefits you would be getting with getting an EIN out of hand.
Why Should I Get an EIN Number?
Now that you know the long and short answer to the “What is an EIN number?” question, we can explain why having one brings many benefits even if you don’t need it. First of all, most banks require an EIN to open a business banking account for you. Having one will make the whole process of tracking and managing your business expenses much more accessible. Not to mention that you’ll be able to build your credit and therefore become eligible for more loans.
Secondly, if you’re planning on hiring part- or full-time employees, you’ll have to apply for a tax identification number. What is an EIN number’s benefit in this case, then? First of all, you’ll need an EIN to set up a payroll, so the IRS can track your taxes for it. Secondly, your employees will need to file their taxes separately under the LLC’s 1040 form, and they’ll need your EIN for that too.
Those with an LLC should outsource its formation to an LLC service, and it will apply for an EIN in your stead. This helps you maintain your “corporate veil,” i.e., protect yourself from personal accountability for possible business debts. Since it’s essential to do this right, hiring an online legal service to cover that would be a great move.
Even as a solo entrepreneur, you will need to provide clients with either a Social Security number or FEIN to pay an invoice or for contract purposes. Having a FEIN adds to the credibility of your business, and shows that you are not doing your work as a gig; instead, you would be perceived as a dedicated professional. Furthermore, an employer FEIN denotes you as an independent contractor, rather than an employee and reduces the legal responsibilities of the company that hires you, which, in turn, might make it more likely to do so.
New entrepreneurs quickly realize that it’s challenging to handle all aspects of the business by themselves. They must rely on suppliers, vendors, and general cooperation from other companies. While nothing will ever guarantee good relationships, having a business with a FEIN makes it more likely for third parties to work with you. Some of them will check your business credit before agreeing to a contract with you; a FEIN shows them you are a reliable entity.
Non-US citizens without a Social Security Number will find it easier to establish a business in the United States with an EIN. This opens up the possibility of getting a business credit card or bank account for their business before getting a Social Security number as a citizen.
Finally, when you get an EIN for tax reporting purposes, your privacy will be protected, too. An EIN boosts the confidentiality of your Social Security number (SSN), as you can now offer that instead of your personal ID number as a form of identification. Keeping your business and private finances separate will add an extra shield against malicious perpetrators. We hope all these good points help you decide to get an EIN as soon as possible – provided you have a company, of course.