When is an employer tax ID number (EIN) required 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 are working on your own as a sole proprietor, you could get by without one. However, if you start as a sole proprietorship and then incorporate or form an LLC, 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 is best to assume that if you have an LLC, partnership, or corporation, you are required 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, 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—are required to get 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.
What are the advantages to getting an EIN for my business when it is not required?
There are reasons for sole proprietors to get EINs, even when it is not required 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 is a quick and easy process. 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.
To obtain an EIN, you will need the following information:
- Name and address of the business.
- Name and social security number or ITIN of the responsible party.
- The type of business and the number of members if the business is an LLC.
- The date the business was started or acquired.
- The primary activity that the business will be engaged in.
There is some additional information that is needed to complete the application. It is best to review Form SS-4 prior to starting the online EIN application so you can gather all of the necessary information.
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 can request a confirmation letter via email so that you have immediate proof that you have applied for your federal tax ID number.
It is best to obtain your EIN tax identification number after you have formed your LLC, corporation, or partnership. You can easily form your business by reaching out to a friendly Business Services specialist at Rocket Lawyer.
Who can I select as the responsible party when applying for an EIN?
The responsible party must be the business owner, principal officer, general partner, grantor, or trustor. A business, for example, cannot be named as the responsible party. The selected responsible party also needs to be an individual that controls, manages or directs the business and the disposition of the business funds and assets. The responsible party’s name and social security number or individual taxpayer identification number (ITIN) is included on the EIN application. For an LLC, the responsible party is often the member with the most control of the business finances. For a corporation, it is common for the officer with the most control of the business finances to be named as the responsible party.
If you have more questions about obtaining an EIN, reach out to a Rocket Lawyer network attorney for affordable 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.