What is an EIN and how can it help your business?
There are a number of formalities and filings to check off your list when creating a business. While it's certainly not as exciting as registering your business name or settling on a logo, filing for an employer identification number (EIN) is one of the essential first steps. But, what is an EIN exactly?
The following guide addresses what an EIN is, how it differs from other identification numbers, when you need one, and how to get it. With this guide, it won't be long before your business is official and ready to start bringing in income and paying taxes.
What is an EIN?
When you're starting a business, one of the first things you likely do is tell your family or friends. But, what about the Internal Revenue Service (IRS)?
An EIN, also known as an Employer Identification Number, is your way of "telling" the government you're starting a business by registering with them as a legal business entity. With this unique nine-digit number, the IRS can track your business and those involved.
This allows the IRS to collect the proper amount of income taxes from your business and enables you to pay that amount. This also makes it possible to file income tax returns, which is a must for businesses operating in the United States.
You can also get an EIN if you're an existing business. Securing an EIN can be optional for some businesses, but for other business entities, it's a must — more on that below.
While you have freedom when choosing your business name, your EIN is assigned to you by the IRS. This makes it similar to a Social Security number (SSN) in that it's given, not chosen. Again, like your SSN, your EIN is something you should memorize over time. You'll be using your EIN for identification purposes when filling out tax forms, when applying for business licenses, and optionally when placing orders from other companies.
Do you need an EIN?
Not every business structure is required to have an EIN. But, many businesses — even sole proprietorships or those who are self-employed — may be required to get an EIN depending on how their business operates.
The IRS has set the following EIN prerequisites to determine which businesses need an EIN:
- Businesses with employees: If your business has any employees, an EIN is necessary.
- Businesses with a Keogh plan: If you or your business partners have the Keogh retirement plan, you need an EIN for your business.
- Businesses that pay taxes for certain items: If your business has filed taxes for alcohol, firearms, employment, tobacco, or excise, you need an EIN.
- Businesses organized as a partnership or corporation: If your business entity operates as a partnership or any type of corporation, such as an S corporation, you need an EIN. A limited liability company (LLC) only needs an EIN if there are multiple people in the organization or if the other criteria from this list apply.
- Businesses associated with certain types of organizations: The IRS has laid out several organizations that need EINs, all of which can be found in their complete EIN list.
- Businesses withholding non-wage taxes from non-resident aliens: If you withhold taxes other than income for a non-resident alien, you need an EIN.
After looking at the above requirements, you might be thinking an EIN is a must for most business owners. This is true. But, for those who don't need an EIN, there are still perks that come with having one.
The perks of an EIN
Your business may not need an EIN for tax purposes, in which case it might be tempting to skip getting one. While you have every right to do so, there are numerous EIN perks to consider.
An EIN number keeps you anonymous
Unlike an SSN, an EIN isn't confidential or sensitive and can be shared freely without fear of identity theft. In fact, an EIN can actually protect you from identity theft.
For example, your EIN can be used on a business bank account, allowing your identity and finances to be kept separate from your business in a confidential way. You can even use your EIN when ordering from a third-party or supplier. This keeps your personal information away from as many hands as possible, lowering your chances of having your identity stolen.
More loan opportunities
If you're operating a sole proprietorship or are self-employed as an independent contractor, you may be able to secure business loans without an EIN. But, this isn't always the case.
Many large banks require an EIN for any kind of business loan or even for a business bank account. Simply put, having an EIN opens more doors when it comes to banking and financials, whether you're looking for loans, business credit cards, or a business bank account.
Better credit tracking
Banks and credit companies will use your EIN to track your credit, making an EIN essential to building your business credit score. This will increase the chances that your business can secure a loan or open other lines of credit down the road. Even if your business doesn't need a loan right now, you never know what the future may hold. Getting an EIN as early as possible allows you to create a longer credit history, which is generally beneficial for your company finances.
Early prep for reorganization
An EIN is a must if you want to restructure your business into one of the entities that require an EIN. By securing an EIN earlier rather than later, you're simply preparing for the future and whatever it may hold. By not having to wait for your EIN application to go through, you won't be holding up any timely restructuring or the sale of your business.
An EIN brings a number of perks, going far beyond what's mentioned above. If you're looking to represent yourself and your brand in the professional world, an EIN will only help you.
How to get an EIN
You have several options when it comes to applying for your EIN. The following steps will ensure you're prepared to apply and help you secure your EIN.
1. Gather the right information
The EIN application is fairly streamlined and is primarily concerned with the social security number or tax ID number of the owner or primary trustor of the company. If you're a single-member LLC, this is you. If you're in a partnership or a future C corp with a board, you need to designate someone as the primary owner of the company and have them complete the EIN application.
2. Apply in one of four ways
Next, you need to complete IRS Form SS-4. This is the EIN application form, and it can be completed in any of the following ways:
- Telephone: If you're an international applicant, you can dial 267-941-1099 from 6 a.m. to 11 p.m. Eastern Time to apply over the phone. Whoever makes the call must be the person listed on the EIN, so be sure that person is available if you decide to go this route.
- Online: The easiest way to apply for an EIN is online via the IRS.gov online application. You can also apply online via the IRS EIN Assistant tool, which makes the process even simpler.
- Fax: If you prefer to fax your EIN application, you can do so by completing the form and faxing it to the right number. The IRS provides a complete listing of the numbers.
- Mail: Similar to the fax method, the mail method requires a completed EIN application form. Once completed, mail the form to the appropriate address, found on the same IRS page as the fax information.
Once you've applied, you simply wait. Generally, responses should be quick, with both the phone and online options providing immediate feedback. Mail and fax, on the other hand, can take time. If you're denied for any reason, correct the errors pointed out in the rejection notice and apply again.
3. Don't fall for fraud
There are fake EIN application sites online that will take your information and steal your identity. Don't apply for your EIN unless it's through the official IRS.gov website. Any other site is likely a phishing site and a scam. If you encounter one of these sites, avoid and report it.
With your new EIN in hand, you'll be ready for a new world of business opportunities.
A more professional future with an EIN
Sure, there's a good chance your EIN is required by the IRS for your business type. But, required or not, an EIN opens a number of doors for your business.
You're now presenting yourself in a new, more professional light. Not only this, you're keeping your identity safer than before and opening yourself up to new financial opportunities from banks and other lenders.
The future is uncertain, but with your EIN, it might just be a little brighter.