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Whether you’re starting a new business or managing an existing one, navigating various tax requirements is a crucial part of operations. That’s where Employer Identification Numbers (EINs) come in.
These unique ID numbers allow businesses to file tax returns, ensuring they comply with current tax regulations. Moreover, companies use an EIN to hire employees, open business bank accounts to separate business and personal income, and even protect their owners’ assets.
In this article, we provide a comprehensive guide to EINs, explaining when you need one and how to obtain it. Read on to learn the essentials of EINs and how they can benefit your business.
An EIN, or a Federal Tax Identification Number, is a unique identifier assigned to every business entity. Most businesses must have an EIN before they can begin operating.
Made up of nine digits, EINs are formatted as XX-XXXXXXX and are unique to each business. EINs identify businesses in the same way that Social Security numbers identify individual residents. However, unlike the sensitive nature of Social Security numbers, a business EIN does not need to be kept private.
EINs help the Internal Revenue Service (IRS) distinguish businesses. They also allow business owners to report their taxes, apply for credit cards, and open bank accounts. More importantly, these tax ID numbers don’t expire, and the IRS never assigns the same number to two businesses.
You must have an EIN if you:
Almost all businesses can obtain an EIN, including limited liability companies (LLCs), sole proprietorships, non-profits, partnerships, government agencies, S corporations, and estates or trusts.
Each business entity has different EIN requirements, which we’ve listed below.
Corporations need an EIN because they’re legally considered separate entities from their owners. In addition, LLCs or partnerships that choose to adopt the IRS “check-the-box” rules for C-corp or S-corp taxation must obtain an EIN.
LLCs need EINs unless the business is a single-member LLC, which the IRS disregards. Owners of the latter type of LLC must report their income, losses, and deductions on their federal income tax returns like sole proprietorships.
Sole proprietorships typically don’t need EINs for their business. Instead, their individual tax ID numbers are used as their EINs.
Obtaining a business EIN for a sole proprietorship may be necessary to prevent delayed payments to your partners or customers and open a business checking account. It also makes your venture more credible to other businesses and your target market while keeping your Social Security number (SSN) private.
Partnerships require EINs in most cases. These businesses only need to obtain a new EIN if they incorporate, one partner runs the business as a sole proprietorship, or a new partnership is formed.
Trusts may need EINs depending on their specific type.
If you manage a revocable trust, you’re not required to obtain an EIN—the trust will use your existing tax ID. Irrevocable trusts, including testamentary trusts, need EINs because they are separate legal entities once created and funded.
Additionally, certain types of trusts will be taxed under their EIN, and others will be taxed to their beneficiaries.
Estates may need an EIN. Typically, the number is required when assets must be probated before being distributed. The individual using the EIN for an estate is considered a fiduciary, such as a personal representative or executor appointed by the courts to administer and distribute the deceased person’s estate.
Personal service corporations may need an EIN for tax purposes. The IRS considers corporations as such if it:
Employers who hire and manage people to help in their homes require an EIN. In this case, an EIN is needed when paying Social Security and Medicare taxes, federal unemployment tax (FUTA), federal income tax withholding, or all of them.
One of the major benefits of obtaining an EIN is that it helps keep personal and business incomes separate. It’s especially important if you compensate employees and yourself for daily work or seek funding through a business loan.
An EIN also helps you build business credit, which becomes helpful for your venture’s growth and further financing. You can use business credit to invest in expansion, daily business expenses, inventory, and additional employees, plus save money for your operations. Every business requires an EIN to pay employees, open bank accounts, file business taxes, and register for state taxes, as well.
Sole proprietors who work as independent contractors or freelancers are typically required to provide either an SSN or an EIN. There’s no question that using an EIN is a better way to protect oneself from identity theft, whether you’re self-employed or own a small business. It can also offer personal asset protection if your business faces challenges such as debts, lawsuits, or bankruptcy.
Applying for an EIN is free and simple. Businesses can apply via phone, fax, mail, or the IRS website.
If you want to obtain an EIN online, your business must be located in the U.S. or U.S. territories. You should also have a valid Taxpayer Identification Number (TIN) that’s required for the EIN application.
Note: Applicants can only register for and obtain one EIN per day.
Online EIN applications are done through their dedicated IRS portal. Remember to finish the application in one session because there’s no option to close it and resume it at a later time. If you become inactive for more than 15 minutes, you must start over.
Generally, the IRS requires EIN applicants to provide information such as:
Depending on your business structure and the specific changes made to it, you may need a new EIN. Here’s how to know when your company is required to obtain a new EIN.
Corporations get new EINs if any of the following conditions apply to them:
New EINs for LLCs are only needed when a new multi-member LLC is created under state law or a single-member LLC is established under state law and elects C or S-corp taxation.
As for a new single-member LLC established under state law and with any of the tax requirements mentioned below, it must obtain a new EIN.
Sole proprietors need a new EIN if they file for bankruptcy, incorporate, or form a partnership. It’s also required upon buying or acquiring an existing business that’s run as a sole proprietorship.
These entities may need new EINs if their funds were used to establish a trust. Representatives of estates with businesses run after the owner’s death must obtain a new EIN for them as well.
If a trust meets any of the following conditions, it’s required to get a new EIN.
In some cases, you won’t need a new EIN for your business. For instance, sole proprietors can keep their EINs after changing their business name or relocating. Corporations need not apply for a new EIN if they’re under a different corporation, use their current EINs after a corporate merger, or change their name.
The IRS lists all instances when companies aren’t required to obtain a new EIN on its “Do you need an EIN?” page.
EINs can’t be canceled—they’re permanently tied to registered business entities. However, if you decide not to use an EIN, the IRS can close your business account.
Simply send a letter to the IRS with your company’s full legal name, EIN, address, and why you want to close your account mentioned in the body of your letter. Attaching a copy of the EIN Assignment Notice sent to you to the letter is also recommended.
Having an EIN is crucial to your business operations. We’re here to ensure your EIN application is filed correctly so you can achieve long-term success.
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