An Employer Identification Number (EIN) is a unique nine-digit number that’s issued by the IRS. It is used to identify a business entity. It acts for businesses the same way as a Social Security Number (SSN) does for individuals. Let’s take a closer look at how to file for the number, the benefits of having one and who needs one.
How Do You File for an EIN?
The process of applying is very easy. You can file for an EIN online at the IRS.gov website. To be eligible, your business must be located in the United States (or the U.S. territories), and you must have a taxpayer ID number, such as an SSN. Fill out and submit your application to be instantly approved as long as you meet the eligibility requirements.
You may also opt to fax or mail in your application. It will take 2 weeks to receive a response if you fax it or 4-5 weeks if you mail it.
Benefits of EINs
There are a number of benefits of having an EIN.
1. Reduce the risk of identity theft. When you have an EIN, you won’t have to provide your SSN to vendors you purchase inventory from or clients you provide services to. That allows you to keep your personal identity safe. Although identity theft can occur with EINs, the problem isn’t as common as it is with SSNs.
2. Prevent tax audits. Another benefit is that you can lower your risk of being audited. Certain types of deductions, such as those for a home office, can trigger an audit for individuals. The chances of this can be reduced for those who have an EIN.
3. Gain credibility. If you’re an independent contractor or freelancer, it’s important to present yourself as a legitimate business owner. When you get paid by clients, you’ll need to provide a tax identification number. Being able to provide an EIN rather than an SSN shows that you take your business seriously and that you view it as more than just a side gig or hobby.
4. Open a business bank account. Every bank has different policies. Some do not allow sole proprietors to open bank accounts without an EIN, whereas other banks have more lenient policies. Bank of America, for example, requires all types of businesses to have one in order to open a business checking or savings account.
5. Establish business credit. Business credit works similarly to personal credit. In order to establish credit for your business, you’ll need to have one of the numbers.
6. Be ready for growth. You’ll need to have an EIN if you have employees. But even if you haven’t hired anyone yet, it’s a good idea to have it in place once your business begins to take off and you’re ready to hire employees.
Who Needs an EIN?
You’ve probably heard that EINs aren’t just good to have but essential for some individuals. How do you know if you’re one of them? Let’s take a closer look at when it is required.
You’ll need to obtain one if your business operates as a corporation or partnership, and/or you have any employees. If you withhold taxes on income (aside from wages) to a non-resident alien, you’ll also require one.
If you file employment, excise or alcohol, tobacco and firearms tax returns, you will also need it. If you have a Keogh plan, this type of tax identification number is also necessary. Additionally, if you’re administering an estate or are the trustee of an irrevocable trust, you will have to apply for one.
Anyone starting a non-profit organization or charitable organization is required to have an EIN before they begin operations. There are a few other situations which may require the number. Be sure to check with the IRS to find out if you’ll need one for your business.
These are just some things to keep in mind about EINs. They’re not only a useful tool for businesses — they’re often required.