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| © Getty Images | The word Employer Identification Number (EIN) on a piece of paper attached to clipboard. |
By Ryan Lasker, The Blueprint
Your business might be the first and last thing you think about every
day. You might even feel you and your business are one, inextricably
linked.
But it’s healthy to have a little separation. The first step is by giving your business its own identity.
Overview: What is an EIN?
Employer
identification numbers (EINs) separate a business’s identity from its
owner’s identity. The IRS uses EINs to identify your business in tax
documents. It’s like a Social Security number (SSN) for your business.
Since states manage business registration,
businesses can share names if they’re registered in different states.
The IRS issues EINs that uniquely identify U.S. businesses to prevent
mix-ups.
Like an SSN, an EIN is a nine-digit number. The format is
XX-XXXXXXX. Businesses use EINs to file taxes and apply for loans and
licenses. Nonprofits
share their EINs so donors can report the gift to the IRS for a tax
write-off. Most businesses set up their EINs during the registration
process.
Sole proprietorships and single-member limited
liabilities companies (LLCs) with no employees generally don’t need an
EIN. If you own any other business type or have at least one employee,
you need an EIN.
The only people who don’t need an EIN for their
businesses are freelancers who don’t employ anyone. The EIN application
can be completed by email, fax, or online via the IRS EIN portal. It’s free to obtain an EIN through the IRS.
The IRS does not have an EIN directory, but we can show you where to find yours with an EIN lookup.
Is ITIN the same as an EIN?
The IRS requires all taxpayers --
both businesses and individuals -- include a tax ID number (TIN) on tax
documents. The IRS uses SSNs, EINs, and individual tax identification
numbers (ITINs) to distinguish taxpayers.
For tax purposes, SSNs
and ITINs are interchangeable. However, ITINs and SSNs differ from EINs.
The tax ID number type you choose depends on whether you’re filling out
a tax form for personal or business tax purposes.
If
you’re paying personal taxes, your federal tax ID number is an SSN or
ITIN. Your personal tax ID number is your SSN if you have one. Those
without an SSN use an ITIN when filing their personal taxes.
EIN vs. SSN: What's the difference?
An
EIN is to a business as a SSN is to a person. The IRS tracks your
personal tax filings with your SSN, just as it uses your EIN to keep
tabs on your business filings.
SSNs (and ITINs) can be used only
in a business capacity when you’re running a business that’s not
required to file taxes separately from its owner, such as sole
proprietorships and most single-member LLCs with no employees.
Businesses that don’t file tax returns apart from their owners are
called disregarded entities.
Consider Eric, a freelance photographer who doesn’t employ anyone. He pays his small business taxes through personal tax Form 1040. He operates as a sole proprietor and isn’t required to have an EIN.
Unless your business is a disregarded entity, you must use an EIN when filing a business tax return.
Most business types must file returns separate from the owners’
personal tax forms, and EINs act as their distinct identifiers.
Regardless
of your business type, you must have an EIN number when you have at
least one employee or have certain retirement plans for self-employed
people. Eric can keep using his SSN when paying business taxes until he
grows his business by adding a new employee.
You need a new EIN
when you change business types or transfer ownership. If Eric wants to
establish his photography business as an LLC before hiring an employee,
he should create the LLC before applying for an EIN.
Can you use an EIN instead of a SSN?
If you’re like Eric and don’t need an EIN, can you get one anyway? Yes, you should, and here’s why.
There’s
no way to avoid using your SSN on your personal tax forms, but there
are other places you can replace your SSN with an EIN to make your
business’s finances more secure and organized.
Having an EIN
allows you to separate your personal and business finances. Most banks
require an EIN -- and often an SSN -- to open a business account or
credit card.
When you have a separate business bank account,
you’ll no longer be asking yourself which expenses on your personal bank
statement go into tax software as small business tax deductions.
EINs
don’t need to be as closely guarded as SSNs because EINs are already
public information. Lending institutions put measures in place to
prevent business identity theft -- but, of course, fraud still happens.
Make the switch to an EIN
Save
yourself a step by securing an EIN now for your growing small business.
You’ll have faster access to credit lines and won’t miss a beat when
hiring your first employee.
See more at The Blueprint
