There’s a lot you need to think about as you’re starting up your own business, or restructuring it, and that includes your new tax arrangement. The IRS doesn’t look at you the same way now that you’re launching a company, so it’s important you establish the proper tax status with the U.S. government.
Here’s a short, simple guide on understanding how business tax IDs work and when you need to obtain one for your enterprise:
What is an EIN?
The acronym “EIN” stands for “Employer Identification Number.” It’s assigned by the IRS, and it’s different for every entity. It’s also called a Federal Employer Identification Number (FEIN) or Federal Tax Identification Number (FTIN).
As Ijeoma S. Nwatu of the U.S. Small Business Administration defines it, “An EIN is a unique nine-digit number that identifies your business for tax purposes. It's similar to a Social Security number but is meant for business related items only.”
That means no two businesses have an identical EIN — even if they’re owned by the same person. The same EIN cannot be used for multiple businesses, as each company is considered a separate entity.
What is an EIN used for?
When you file your personal taxes, you use your distinct Social Security number to distinguish yourself from other filers who may have the same name as you. It’s a simple way to identify yourself for tax-recording purposes. You’ll use the government-issued EIN in the same way when you file a business tax return.
In addition, Nwatu points out you’ll need an EIN to apply for business licenses so you can legally operate. Plus, having an EIN allows you to open a business bank account with a credit card and merchant services.
Having an EIN offers opportunities to build credit so you can qualify for a loan or a line of credit. Plus, it protects business owners from personal liability for their business’ debts.
Is having an EIN mandatory?
The requirement for a business to have an EIN depends on if it meets certain criteria. TRUiC’s helpful “How to Start an LLC” guide outlines that you are required to obtain an EIN if your business has employees, files excise taxes, is a partnership or corporation, or withholds taxes for nonwage income paid to a non-resident alien.
That means an EIN is not mandatory if your business is a sole proprietorship or single-member LLC that does not have employees. And you don’t need an EIN if you’re self-employed.
However, you still may want to consider getting an EIN in these situations for the benefits it provides — specifically separating your business finances from your personal finances and protecting you from possible identity theft.
How can you get an EIN for your business?
Luckily, obtaining an Employer Identification Number is fast and free. You don’t have to jump through a bunch of hoops to receive one from the IRS — especially if you apply online on the IRS website.