Employer Identification Number (EIN) is a number for your business assigned by the U.S. Internal Revenue Service (IRS).
The EIN is used by the IRS for the identification of a business for taxation purposes. Your business is required to have its own Tax ID for income tax forms, bank accounts, and employee tax reports and payments.
In a nutshell, Employer Identification Number (EIN) serves the same purpose for a business as a Social Security Number (SSN) does for an individual.
Who Needs an EIN?
An EIN number is a requirement for any business that fulfills the following conditions, no matter how small the venture is:
- If you have one or more part-or full-time employees, even for sole proprietorships
- If you are paying for services or contractors an amount exceeding $600 in a calendar year
- If you are entering into certain business structures like a joint venture, partnership, limited liability company or corporation
- When you want to separate your personal and business finances, use an EIN to apply for business permits
What Can You Do with an EIN
1. You Can Use an EIN to Open a Bank Account
When you open a business, one of the first tasks should be to open a business bank account. However, to do so you will need to obtain an EIN for your business since your bank will require it.
The business account can then be used to keep your business banking separate from your personal. While some business owners prefer using different banks – in their personal names – for the separation, having a business account offers you several advantages, including:
Clean and accurate bookkeeping: Mixing your personal and business transactions over the course of a year can lead to a nightmare experience during income tax time.
Keeping your business transactions separate offers you a clean record that you can give your accountant at the end of the year.
Prove your business is not a passing hobby: The IRS is particularly picky about the ability of a business owner to show that a business is a real one and not a hobby. The Federal Tax Form Schedule C requires business to show a profit three out of every five years.
If you are consistently posting losses from deductible income, then the IRS might decide that you are carrying out a hobby business, inviting an audit. You can further prove your business is not a hobby by getting business credit cards using the EIN.
Business accounts are required for incorporated businesses: To the IRS, if your business is incorporated, you have to maintain a separate business bank account.
A clear audit trail: There is always a chance that you will be audited by the IRS (hopefully, that will never happen). But when it does, it is not the end of the world as long as you have a separate bank account and clean record-keeping.
Professionalism: A business’ image depends on how professionally it conducts itself. Keeping a separate business account will enhance your professionalism image.
This means that when you write out checks to suppliers, they can see that they come from real on-going business. As you pay taxes, the IRS can also see that the payments are coming from a real business.
2. You Can Use Your EIN to Apply for Business Licenses
You will be required to present an EIN to apply for a business license or permit. The licenses and permits are mandatory documents that all you to legally open and carry on your business.
In addition, if you have employees or selling taxable products, the taxing authorities will require your EIN.
The pitfalls of not acquiring the necessary licenses include:
- Your business location can be padlocked
- You cannot operate in a new location
- Hefty interest from penalties and even possible personal liens
3. You Can Use Your EIN to File Tax Returns
Businesses are required to file several tax returns using their EIN just like individuals use their Social Security numbers.
To the IRS, the EIN is an account number that helps keep track of your business’ tax returns. If you own a single-member LLC and required to file a separate tax return, then you need an EIN.
An LLC has the freedom of choosing whether to be taxed as a corporation or partnership, and single-member LLCs can choose to be treated like a corporation or disregarded entity. The IRS considers a disregarded entity as a sole proprietorship.
By default, sole proprietorships carrying out business as an LLC do not require separate EIN numbers unless they have employees or required to file excise tax returns. Plus, if you are filing an alcohol, firearms or tobacco tax return, the IRS requires you to have an EIN.
4. You Can Use Your EIN to Build Business Credit
Your business can use an EIN for credit purposes like applying for a credit card. This allows you to acquire credit professionally as a business and independent of your personal credit situation.
When you apply for business credit, a financial institution will evaluate both the owner’s and business’ creditworthiness before extending credit. Applying for business credit using the EIN means that you are not risking your personal credit to get a lower credit score.
In addition, having a good business credit score will:
- Help qualify you for more business financing opportunities in the form of business credit cards and loans at the largest financing amounts for the lowest interest rates
- Help build trust among suppliers and lenders who are likely to offer you favorable payment options
- See some suppliers, lenders and creditor are extending you credit without even checking into your personal credit history
However, you cannot use your business’ EIN as a replacement of your Social Security number to apply for personal credit. In addition, it is against the law for an individual to obtain an EIN under the false pretense of being a business owner.
5. You Can Use Your EIN When Your Require Vendors to Pay
When you perform work for your client, the client is most likely going to ask you to fill out a W-9 form before they can pay you. The W-9 form gives your client the information required for tax return purposes. On the form, you have to provide an EIN to identify your business.
The Benefits of Getting an EIN
Some business structures, like single-member LLCs and sole proprietorships without employees are not legally obliged to get an EIN. In such cases, you can use your Social Security number in place of the EIN for tax filing and other day-to-day business activities.
However, an EIN offers you several benefits, including:
- Keeping your personal and business finances separate for liability and accounting purposes. Banks, the IRS, credit card companies and other entities that you conduct business with will track your business finances without involving your personal finances.
- Providing your SSN to lenders, suppliers and others in place of an EIN exposes you to identity theft. While an EIN will not eliminate your chances of becoming an identity theft victim, at least your personal accounts are not on the line.
- An EIN number gives you – and others – the assurance that your business is a separate entity, preserving limited liability should your business be sued. Multi-member LLCs and corporations are other business models that offer limited liability and are required to have an EIN.
Also, it is important to remember that your business’ requirements are likely to change in time. While you started out as a one-man show sole proprietorship, you may end up hiring staff in a couple of months. At this point an Employee Identification Number will be needed if you did not get one at the beginning.
Although an EIN may not be a legal requirement for some small businesses, there are still good reasons to get it. The process is free and easy, so there is no reason to put it off any longer.
How to Get an EIN with an SSN or ITIN Number
If you have a U.S. Social Security Number (SSN), you may apply for your EIN here.
You can apply for an EIN online, as long as you have a Social Security Number (SSN) or Individual Taxpayer Identification Number (ITIN). Online application is the fastest method to get an EIN.
However, if you do NOT have a Social Security Number (SSN) or Individual Tax Identification Number (ITIN), the process of getting an EIN is more complicated and will require a business lawyer to act as your Third-Party Designee for your EIN to apply for your EIN on your behalf.
Read more below to find out how...
How to Get Your EIN Number Without ITIN or SSN
Many people residing in the United States think that they cannot own their own businesses without an SSN or ITIN number. However, it is possible to start a business once you get an EIN no matter whether you reside in the country or without an ITIN or SSN.
Here are the steps to apply for your EIN if you do not have an SSN or ITIN:
Step 1: Have a business lawyer act as your Third-Party Designee to apply for your EIN on your behalf..
Step 2: Your lawyer will be required to assemble all the necessary documentation and prepare your EIN.
Step 3: Once the lawyer prepares the application, they are required to get in touch with the IRS to process your EIN application.
Step 4: Upon successful consideration of the application by the IRS, your lawyer will be expected to pick your EIN on your behalf.
If you need an EIN but do NOT have a U.S. Social Security Number, feel free to contact me at email@example.com and I can help you get your EIN.
An EIN is essential for any business. Not only because of employees and payments, but because there are numerous benefits that you stand to enjoy.
In addition, some of the companies you deal with will require an EIN for authentication purposes, so it does not harm your company in any way to stay organized.
In fact, having an EIN is likely to increase your business’ credibility in a world that has made the number a necessity to stay competitive. It is important that you do not ignore its significance in your business and obtain it as part of your core business documents.
Now that you understand what an EIN means to your business and how to get one with or without ITIN or SSN, you can make a decision that is based on facts. You can contact Sam Mollaei, Esq. at firstname.lastname@example.org or call (818) 925-0002 for help with the process.