Do You Need an EIN (Employer Identification Number)?
If you’re starting, or even growing, a small business you may find yourself in need of an EIN, also known as an Employer Identification Number. If you’re wondering what exactly an EIN is, if you need an one, or how to get one, then you’ve come to the right place.
What is an Employer Identification Number?
An EIN is kind of like a Social Security number for your business. The Internal Revenue Service (which gets the last word) says, “An Employer Identification Number (EIN) is also known as a Federal Tax Identification Number [TIN], and is used to identify a business entity.” In human terms, that means your business’s EIN is how the federal government keeps track of your business’s income. Each number is unique to the business to which it’s assigned.
Many small business owners, however, find that figuring out if they need one and then going about getting one can be confusing.
Do I need an EIN?
This is, of course, the most basic question. The answer is the always helpful, “Well, maybe. It depends.”
If your business is an S corporation or a general or limited partnership, you need an EIN.
The IRS provides some basic criteria to determine whether or not an EIN is necessary for a particular business. Keep in mind that your answers to these questions will likely change over time, so don’t forget to check back as your business grows.
The questions you’ll want to ask yourself at every stage in your business growth are:
If you answered Yes to any of the questions above, then your business needs an EIN number to operate legally.
What can be especially confusing for the 22.5 million small business owners who are sole proprietors (who don’t have any employees) is that the fact that, the IRS does not require such businesses to have an Employer Identification Number. If you’re a sole proprietorship without employees and answer No to all the above criteria, the IRS allows you to use your personal Social Security number as your business tax ID number. The logic is that you essentially are the business, a sentiment which which most small business owners can agree.
One caveat for the sole proprietor just getting started or hoping to grow with a staff: It might be worthwhile to go ahead and get your EIN now. On the one hand, you can use your employer identification number with clients, keeping your individual Social Security number more secure. On the other hand, if you do need to bring on a staff member, having your number means you can do so immediately rather than wait while the IRS processes your request.
Do I need a new EIN?
But I have an Employer Identification Number, you say. Nonetheless, there are circumstances that require businesses to obtain a new EIN. If the business’s ownership or structure has changed, a new number is required. (You don’t need one for a business name or address change.) Other circumstances that require a new EIN include the bankruptcy of a sole proprietorship and, for corporations, a new charter from the secretary of state.
How do I apply for an EIN?
The “responsible party” should apply for the Employer Identification Number, which means your business’s principal officer or owner. This is the person who “controls, manages, or directs the applicant entity [your company] and the disposition of its funds and assets.”
Your first and only stop should be the IRS. Only the federal government can generate an EIN and, unlike so many things, this is totally free. Occasionally, online services pop up trying to exploit small business owners who don’t know the process. These services will charge a fee for filing for an EIN on a small business’s behalf. In fact, the IRS explicitly warns business owners against these services. So, our advice is the same as the IRS’s: Stay away from websites that charge for this free service.
In addition to being free, signing up for an EIN is also pretty straightforward and easy to navigate (yes, I’m using the words “easy” and “IRS” in the same sentence!).
If you answered yes to any of the above questions, or if you’re a sole proprietor and would prefer to get ahead of the curve, here’s how to proceed. The IRS offers three options:
- Apply Online (takes a few days)
- Apply by Fax (takes about a week)
- Apply by Mail (takes 4-5 weeks)
The online form is by far the quickest way to apply, as you hear back within a few days. If you already have an EIN and are applying for a second or new number, the IRS can’t process your application online if your previous EIN was obtained through the Internet; you’ll have to use the mail or fax option. If you apply by mail or fax, you’ll be filing the same exact form, the memorably titled Form SS-4. Regardless of which option you choose, Form SS-4 is perhaps the least daunting IRS form you’ll ever encounter. It’s a single page and the information fields to fill out are straightforward. It shouldn’t take more than 15 minutes to fill out.
Keep in mind that it will take up to two weeks for your shiny new EIN to become part of the IRS’s permanent records. You’ll need to wait that period before you can use it to file returns or make tax payments.
When do I use my EIN? And other questions
Your EIN will come in handy beyond filing tax returns and making payments. Small businesses can use the number to open bank or credit card accounts and apply for business licenses and permits. If you use contractors, you’ll need your EIN to fill out the 1099s. Most businesses that get an EIN are automatically enrolled in the Department of the Treasury’s Electronic Federal Tax Payment System (EFTPS). Once you receive your EFTPS enrollment confirmation in the mail, you can make all your payments online or via phone. (EFTPS is also available for individuals.)
The IRS doesn’t cancel EINs, but if you no longer need your number, you can close your EIN account.
If you have more questions, the IRS’s Understanding Your EIN probably has the answers.
If you have questions about the tax-related responsibilities for employers, you can check out the IRS’s Employer Tax Guide online.