Do I need an employer tax ID number (EIN) for my business?
Most businesses have EINs, but not all businesses have to get them. You'll always have to get an EIN if you plan to hire people, but if you're working on your own, you could get by without one. However, if you start as a sole proprietorship and then incorporate, you will have to get an EIN.
According to the IRS, you need an EIN if you:
- Hire employees or withhold taxes for income paid to nonresident aliens.
- Get a new charter from your secretary of state.
- Decide to change your business's form (such as incorporating your sole proprietorship).
- Create your corporation out of a statutory merger.
- File tax returns for employment; excise tax; or alcohol, tobacco, or firearms.
In general, though, it's best to assume that if you have an LLC, partnership, or corporation, you'll need to get an employer tax ID number. In some cases, you may be able to avoid the identification process if you choose to be treated as an S-Corporation and meet your state's requirements for a closed corporation. Such exceptions are fairly rare, though, and it might be best not to rely on them.
Still, there are circumstances in which even sole proprietors—self-employed people working on their own—do need EINs. If you're self-employed, you will need an EIN if you:
- Get involved in bankruptcy proceedings. It allows the government and your lending institution to monitor the business and serve the proper accounts.
- Enter into a partnership with another person. This is true even if that person doesn't plan to participate actively in the business.
- Purchase or inherit an already established business. This is not the case if you just change the name or location of your business.
Should I get an EIN for my business, even if it isn't required?
There are reasons for sole proprietors to get EINs, even if they're not required to do so by the IRS. Most importantly, you can give your EIN to clients who need it to complete tax forms, rather than your SSN. EINs are much less susceptible to identity theft than Social Security Numbers. It's also, in general, a great way to keep your personal finances separate from your business finances.
Other advantages of getting an EIN (instead of using your personal SSN), even when not explicitly required by law, include:
- The legitimacy of providing a business name and EIN to clients (as opposed to your legal name and SSN).
- Better odds of establishing business credit and securing a business loan (banks often require applicants to have an EIN to open up a bank account).
- The ability to quickly hire employees if and when the need arises.
How do I get a federal tax ID number?
If you need an EIN or have decided that it's in your best interests to do so, the good news is that it's quick and easy. While you may opt to fill out IRS Form SS-4 and send it through the mail (10-14 day turnaround), it's much quicker (roughly 15 minutes) to do it online using the EIN Assistant provided by the IRS.
Plan to complete the entire application in a single sitting. If you remain inactive for more than 15 minutes, the online assistant will reset, and none of your information will be saved. Likewise, if your system happens to crash during the process, you will have to start over. As soon as you finish the application and submit it, you will receive your number.
The IRS will mail a hard copy to you, but you should request an additional confirmation letter so that you have proof that you have applied for your federal tax ID number. The confirmation letter will arrive in a PDF format, so you will also need to install Adobe Acrobat Reader or another pdf reader, if you do not already have one.
Once you obtain your EIN tax identification number, you can easily form your LLC, corporation, or partnership by reaching out to a friendly Business Services specialist at Rocket Lawyer. Feel free to ask a lawyer if you require additional legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.