Welcome to the first part of our three-part series for Guidant Financial covering the (e)ins and outs of Employer Identification Numbers (EINs)!
This series takes an in-depth look at what an EIN is and why it matters so much to entrepreneurs. We will also cover what it takes to file for an EIN and the key differences between EINs and TINs in later posts.
For now, as I mentioned above, let’s get back to EIN basics. Take a look at what the first post in our series will cover.
What is an EIN?
An employer identification number (EIN) is a federal tax identification number. An EIN is issued by the IRS to identify a business entity. It’s basically a corporate version of a social security number (SSN), only less sensitive. More about that in a moment.
Entities like corporations, LLCs, sole proprietors, and more may use an EIN for multiple purposes. EINs allow entrepreneurs to open up business banking accounts, pay federal taxes, fill out payroll reports, and hire employees. As a bonus, once an EIN has been issued to a business it does not expire. Keep in mind, however, that once it has been issued it will not be reissued again.
How is an EIN Formatted?
EINs have a lot in common with SSNs. They are a unique number that is nine digits long and, as mentioned, is less sensitive to use on documents than an SSN. Businesses are legally required to identify their companies with either an SSN or EIN and many choose to use their EIN.
Why do entrepreneurs use an EIN to identify their business? EINs act as a safeguard. It is less sensitive than an SSN. Those who would rather use extra precautions against having their personal identity stolen may file for and obtain an EIN. However, be mindful that an EIN still works to protect personal information. Don’t write it just anywhere or leave the number laying around for everyone to see. Take care of this number as much as you would an SSN when using it on official documents and paperwork.
Why Should I Have an EIN?
This is my favorite part of the article because I get to list off all of the benefits that come with obtaining an EIN for a business! If you’re on the fence about filing for an EIN, these reasons might persuade you to get started.
9 Reasons to Have an EIN
- You’re opening a business bank account. If so, you’ll need to file for an EIN. This is generally a requirement from most banks before bank accounts may be opened under a business name.
- You’re establishing a credit profile. Your business credit profile is separate from that of the entity’s owners or members.
- You’re forming an LLC or corporation. If you incorporated the business as an LLC, partnership, or corporation, it is advised that you obtain an EIN. This includes partnerships, where there are at least two people involved with the business and both may not use their SSNs simultaneously to identify the company.
- You’re hiring employees. This is a requirement before a business may hire, or plans to hire, employees. What if you don’t plan to hire employees? Technically, you count as an ‘employee’ once the business has been incorporated. As such, an EIN becomes crucial so that the IRS may track your business and ensure that it remains in compliance. This includes collecting payroll tax and, for some corporations, its own tax.
- You’re planning to change your organization type. Let’s use the example that you initially incorporated your business as a sole proprietorship. Later on, you decide to switch to another entity, like a partnership. You would need to have an EIN because the ownership of your organization has changed.
- You’re establishing pension, profit sharing, and/or retirement plans. You are considered to be a plan administrator if you are creating these types of plans.
- You’re filing employment, excise, alcohol, tobacco, or firearm taxes.
- You’re withholding income tax to a non-resident alien. A non-resident alien may be an individual, corporation, or partnership.
- You’re filing annual tax returns.
Does an EIN Matter More to Certain Entities Over Others?
There are some entities that require EINs and others that do not. Entities like sole proprietorships may use their SSN instead of obtaining an EIN while the IRS advises limited liability companies (LLCs) to file for an EIN. This is particularly necessary if the LLC has hired employees or must file excise tax forms.
The rules change subtly for single-member LLCs. A single-member LLC classified as a disregarded entity may use the owner’s SSN or EIN for information returns and reporting related to income tax. However, if a single-member classified as a disregarded entity has no employees or excise tax liability, they do not need to obtain an EIN. Instead, they may use single-member owner’s name and TIN for taxes.
What about C corporations? Perhaps it was not always a rule that C corporations needed EINs in the past, but that has changed. Current tax laws mandate that C Corporations are required to file for and obtain EINs. It’s necessary for C Corporations to have this type of identifier, as their entity conducts business by way of opening business bank accounts, establishing its own credit profile, and hiring employees.
Regardless of entity type, filing for an EIN is essential to keeping your business compliant with tax laws.
Join us next month for a glimpse at the EIN filing process! We will cover the information you need to have ready when filing an application, anticipated filing cost, and how long you can expect to wait for approval!
Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.