An EIN is necessary for filing taxes, hiring employees, and opening a bank account for your business. Follow these tips to obtain your unique number.
If you’re applying for a new Employer Identification Number (EIN), you can obtain one directly from the Internal Revenue Service (IRS) at no cost using the online EIN application. The IRS also provides guidance to help you through the process.
This article will walk through key details of applying for a business EIN, including requirements, when you may need one, and how it supports your business as you grow.
Key Takeaways
- The IRS uses an employer identification number (EIN) to identify your business for tax purposes.
- New businesses interested in EIN obtainment can apply for an EIN easily on the IRS website.
- Having an EIN can help you expand and improve your business. Check that you’re eligible first before applying.
What Is an EIN?
Like an individual social security number (SSN), an employer identification number (EIN) is a unique nine-digit number assigned to a business entity. It’s also known as a Federal Tax Identification Number, and the Internal Revenue Service (IRS) uses it to identify businesses when they file their tax returns. In most cases, business entities need an EIN.[1]
Having an EIN helps businesses carry out essential tasks, like opening a business bank account, applying for business licenses, and filing tax returns. [2] The IRS is the federal body that collects taxes and enforces tax laws in the U.S. Its job is to ensure that businesses pay their taxes correctly and on time.
While most business entities need an EIN, not all do. If you need to get an EIN number, keep in mind that requirements vary by business type. Typically, operating as a corporation, partnership, or nonprofit requires an EIN. [3] You should apply for one early on to get the licenses you need to operate. [2] It can also protect your privacy as an individual since it saves you from having to use your personal SSN for business purposes.
Tax Purposes
As mentioned earlier, an EIN is critical to your business for several reasons. Most importantly, following federal law for tax purposes is vital. The IRS will use your EIN to identify your business entity when filing business taxes.[4]
It’s helpful for new businesses to apply for an EIN early on to avoid trouble when filing tax returns. It helps separate personal and business finances by being able to file them individually. This way, you can divide your personal assets when receiving an income tax return.
Hiring Employees
Getting an EIN is vital in growing your business because it allows you to hire employees. New businesses need a specific tax ID number to report employment taxes and give tax statements to employees or annuitants. In addition, it is also included on forms given to employees, forms returned to business owners, and forms sent to the IRS and the Social Security Administration. [5]
An EIN identifies the business when withholding, depositing, reporting, paying, and correcting employment taxes. The IRS has a guide to help explain the requirements and how to handle each employee’s taxes each tax season. For more information or more complex topics, check out the IRS’ supplemental tax guide for employers.
Opening a Business Bank Account
Having another bank account solely for business-related expenses can help keep your personal and business finances separate, which can be especially helpful for small businesses. And you guessed it: To open a business bank account, you will need an EIN. Business owners should open a separate bank account when they start accepting and spending money as a business. [6]
There are several benefits to having a business bank account [6]. Perks can include:
- Purchasing power: Opening a separate line of credit via a business credit card can help you expand your business. It enables you to make big purchases early on, be prepared for future purchases, and establish a new credit history.
- Protection: Separating business funds from personal funds helps you stay organized and offers limited personal liability protection. Business banking and merchant services also help protect customers by keeping their personal data secure and private.
- Professionalism: An official business bank account adds a layer of professionalism by helping establish your entity. Customers can make payments directly to the business instead of an individual. In addition, finances and transactions will go to a separate account rather than taking the risk of mixing personal and business expenses.
Who Needs a Federal Tax Number?
While most new business owners need to apply for an EIN, not all do. A self-employed sole proprietor without employees who does not file any excise or pension plan tax returns does not need an EIN. However, they can still apply for one to keep things separate. In this case, the sole proprietor can use their personal SSN – rather than an EIN – as their tax identification number when filing taxes. [7]
According to the IRS, business formations that require an EIN are:
- Businesses with employee
- Businesses that operate as a corporation or partnership
- Businesses that file the following tax returns: Employment, Excise, or Alcohol, Tobacco, and Firearms
- Businesses that withhold taxes on income – other than wages – paid to a non-resident alien
- Businesses with a Keogh Plan [3]
In addition, businesses involved with any of the following organizations will need an EIN:
- Trusts, except certain grantor-owned revocable trusts, IRAs, Exempt Organization Business Income Tax Returns
- Estates
- Real estate mortgage investment conduits
- Nonprofit organizations
- Farmers’ cooperatives
- Plan administrators [3]
Essentially, most organizations need an EIN. Just because your business has a number that the IRS can use to identify it for tax purposes, it doesn’t necessarily mean it needs to pay taxes. Some types of entities are tax-exempt, like churches, church-controlled organizations, or other nonprofit organizations. Note that an EIN is not the same as a tax-exempt number. [8]
EIN Application Checklist:
- Check your eligibility requirements.
- Designate a responsible party.
- Submit the necessary documents.
- Apply online through the IRS.
Eligibility Requirements
Before applying for an EIN, ensure you are eligible for one. Even tax-exempt organizations, like churches and nonprofits, need an EIN if they have employees or file any excise or pension plan tax returns.
Requirements for applying for an EIN include [9]:
- The principal business is located in the United States or U.S. territories
- International applicants are allowed to apply for an EIN [10]
- The person using has a valid taxpayer identification number, like an SSN or ITIN [4]
- This may exclude non-resident aliens if they do not have an SSN
- Limiting to one EIN per responsible party per day
Responsible Party
A responsible party is the person who ultimately owns the entity. This can be in the form of controlling the business and related decisions, managing the business, or directing the applicant entity and the disposition of its funds and assets. [11]
This must be a person unless the applicant is a government entity. EIN applications must include the responsible party’s legal name and taxpayer identification. The IRS will recognize a true principal officer, general partner, grantor, owner, or trustor. [11] Only one responsible party can apply daily when applying for a new EIN. [9]
If you plan to designate a third party as your business’ responsible party, you must note this in the application form SS-4. There is a separate section at the bottom of the form titled “Third Party Designee.” The taxpayer must sign the form to be authorized legally and correctly. [10]
Necessary Documents
For most business owners applying for an EIN, you must fill out and submit Form SS-4 with the IRS. As mentioned throughout this article, applicants must provide the required information like a legal name, tax identification number, and responsible party when applying for an EIN. International applicants or non-resident aliens may need additional documentation in their applications.
Different business entity types may require a different set of forms. See below for what form your business structure needs for EIN obtainment.
- Business structure
- EIN application form
- Limited Liability Company
- Form SS-4
- S Corporation
- Form SS-4
- C Corporation
- Form SS-4
- Partnership
- Form SS-4
- Sole proprietorship
- Depends (see below)
The only exception where an entity type does not use the SS-4 form is a sole proprietorship. A sole proprietor without employees who does not file any excise or pension plan tax returns does not need an EIN. While they can still apply for an EIN, the sole proprietor usually uses their personal SSN – rather than an EIN – as their tax identification number when filing taxes. [7]
Online Application through the IRS
While multiple ways exist to file an EIN application, online is the easiest and fastest way. The Online EIN application is the IRS’ preferred method for business owners to apply and get their EIN. Rather than waiting several business days, the information gets transferred once the application is complete and an EIN is issued immediately. [10]
Small businesses can head to the IRS.gov site to find other application methods. If approved via fax, the IRS will send a fax back with the EIN within four business days. Mailing an application will take even longer to warrant a response within four weeks. [10] For the fax number or addresses of where to submit your faxes or mailed application, see “Where to File Your Taxes for Form SS-4.”
Obtain an EIN Number With an Online Filing Service
Applying for a new EIN comes with several critical steps and requirements. If done incorrectly, your application might get rejected by the IRS, which delays or even prevents your business from getting off the ground. While applying directly through the IRS is free, some business owners choose to use a service provider for guidance and support throughout the application process. Swyft Filings' automated EIN filing process is seamless with professional expertise at the foundation, so you stay compliant.
The online application is quick, easy, and reliable from start to finish. Business owners can save money and time by avoiding mistakes and, more importantly, preventing potential drawn-out communication with the IRS. Our customer service takes you through the process with quick turnaround times so entrepreneurs can focus on what they do best.
Bibliography
1. Internal Revenue Service. “Employer ID Numbers.” Accessed 10 April 2023.
2. U.S. Small Business Administration. “What is an EIN and Why is it Important?” Accessed 10 April 2023.
3. Internal Revenue Service. “Do You Need an EIN?” Accessed 10 April 2023.
4. Internal Revenue Service. “Taxpayer Identification Numbers (TIN).” Accessed 10 April 2023.
5. Internal Revenue Service. “Publication 15: (Circular E), Employer’s Tax Guide.” Accessed 10 April 2023.
6. U.S. Small Business Administration. “Open a Business Bank Account.” Accessed 10 April 2023.
7. Internal Revenue Service. “Frequently Asked Questions.” Accessed 10 April 2023.
8. Internal Revenue Service. “Employer Identification Number.” Accessed 10 April 2023.
9. Internal Revenue Service. “Apply for an Employer Identification Number (EIN) Online.” Accessed 10 April 2023.
10. Internal Revenue Service. “How to Apply for an EIN.” Accessed 10 April 2023.
11. Internal Revenue Service. “Responsible Parties and Nominees.” Accessed 10 April 2023.
12. Internal Revenue Service. “Lost or Misplaced your EIN?” Accessed 10 April 2023.
13. Internal Revenue Service. “Do You Need a New EIN?” Accessed 10 April 2023.