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Why are Employer Identification Numbers (EINs) Important for my Business?
Assigned to every business entity, EINs are unique identifiers that most businesses must have before they can begin operating. EINs contain nine digits and are unique to every business. In fact, EINs identify businesses in the same way that Social Security numbers identify individual residents. However, a business EIN does not need to be kept private.
EINs not only help the Internal Revenue Service distinguish businesses, but allow business owners to report their taxes. In addition, with an EIN, businesses are able to apply for credit and open bank accounts.
Most businesses must have an EIN before they can begin operating. You must have an EIN if you employ others, operate as a corporation or partnership, file tax returns, or withhold taxes. EIN numbers do not expire, and the same number is never assigned to two businesses.
Every business type can obtain an EIN, including LLCs, sole proprietorships, non-profits, partnerships, government agencies, S corporations, and estates/trusts. Once a business has an EIN, the business must apply for a new EIN if they decide to change their ownership structure.
Advantages of Applying for an EIN
There are numerous benefits of having an EIN. The main perks include being able to function as a business and separating personal income from business income. In addition, every business requires an EIN to hire and pay employees, open bank accounts, get credit, file business taxes, and register for state taxes..
Sole proprietors who act as independent contractors or freelancers are typically required to provide either a Social Security number or an EIN. There is no question that using an EIN is a better way to protect oneself from identity theft, rather than providing your personal Social Security Number.
Which Specific Business Entities Require an EIN?
Most business entities require an employer identification number, including those that have employees, operate as corporations or partnerships, file certain tax returns, or withhold income taxes on income other than wages. However, because each type of business entity has different requirements re an EIN, it is important to understand the numerous requirements listed below:
Corporations need their own EIN because a corporation is legally considered to be a separate entity. In addition, if the name of a business changes, if the business becomes a subsidiary of another corporation, or if the structure changes to a sole proprietorship or partnership, the corporation may need to acquire a new EIN.
Partnerships require EINs in most cases. Acquiring a new EIN is necessary in the following scenarios: if one partner develops a sole proprietorship, if the partnership incorporates, or if a new partnership is formed.
Sole proprietorships typically do not need EINs for their business.
Limited Liability Companies (LLCs) need EINs unless the business is a single-member LLC. However, an EIN is required when the business has one or more employees or the business is declaring bankruptcy.
Trusts may need to apply for EINs for certain types of trusts. Irrevocable trusts, including testamentary trusts, need their own EINs because they are separate, legal entities once created and funded.
Nonprofit organizations are required to obtain an EIN before applying for 501(c)(3) tax-exempt status.
Estates may need an EIN. Typically, an EIN is required in situations where 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.
Employee benefit plans, including health and retirement plans, need their own EINs.
Personal service corporations may need an EIN for tax purposes. If a business performs personal services, such as consulting, engineering, accounting, health, or law, your business may be considered a personal service corporation, and an EIN is important for tax purposes.
Household employers (employing someone to help in your home) require an EIN. In this particular scenario, an EIN is needed to report payroll tax withholding.
Obtaining an Employer Identification Number (EIN)
Applying for an EIN is a free service offered by the Internal Revenue Service. It is important to watch out for websites that charge money for this free service.
All EIN applications (mail, fax, electronic) must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the true principal officer, general partner, grantor, owner or trustor. According to the IRS, the required information includes the following:
–The name of the company’s principal officer, partner, or owner, as well as their personal taxpayer identification number
–The type of entity
–The reasons for applying, such as developing a new business or change of organization
–The start or acquisition date
–The principal business industry
Apply Online:
The Internet EIN application is the easiest method in which to apply for an EIN. Once the application is completed, the information is validated during the online session, and an EIN is issued immediately. The online application process is available for all entities whose principal business, office or agency, or legal residence (in the case of an individual), is located in the United States or U.S. Territories.
Apply by Fax:
Taxpayers can fax the completed Form SS-4PDF application to the appropriate fax number (see Where to File Your Taxes (for Form SS-4)), after ensuring that the Form SS-4 contains all of the required information. If the entity needs a new EIN, one will be assigned, using the procedures for the entity type. If the taxpayer’s fax number is provided, a fax will be sent back with the EIN within four business days.
Apply by Mail:
The processing timeframe for an EIN application received by mail is four weeks. Be sure that Form SS-4PDF contains all of the required information. If the entity needs a new EIN, one will be assigned using the appropriate procedures for the entity type and mailed to the taxpayer.
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