Does My Business Need an Employer ID Number?
Thanks to the gig economy, a growing number of people are inspired to take control of their financial future by starting their own business. One of the first things they ask themselves is, “Do I need a tax ID number for my business?”
In most cases, the answer to that question is yes. But there are exceptions.
EINs, TINs, and Tax IDs Explained
The Internal Revenue Service (IRS) uses taxpayer identification numbers to track payments to individuals and businesses for tax purposes. There are three primary types:
Social Security Number (SSN): assigned to U.S. citizens at birth, and to some permanent residents to track their income and determine eligibility for benefits like social security.
Individual Taxpayer ID Number (ITIN): issued to individuals who need to have a U.S. taxpayer identification number but who do not have, and are not eligible for a Social Security number. Required for resident aliens to file taxes.
Employer ID Number (EIN): used to identify business entities. Although it refers to ‘employer identification’, businesses without employees may also need an EIN.
In general, you will need a tax ID number (EIN) if your product or service involves any form of taxation. (For example, if you charge tax or your state levies a tax against your offering.) An EIN is also required if:
Your business has employees
You withhold taxes on income (except wages) that you pay to a nonresident alien
You run a corporation or partnership
You file employment, excise or Alcohol, Tobacco and Firearms tax return
You have a Keogh plan
Your work involves IRAs, trusts, estates, plan administrators, farmers’ cooperatives, nonprofit organizations
EINs are also used to:
Open a business bank account
Apply for a business loan
Obtain business licenses and permits
Report and remit federal payroll taxes
What About Sole Proprietors?
If you run a sole proprietorship or single-member LLC with no employees, you can use your Social Security number as the tax ID for your business, as the company files and pays income taxes through your personal tax returns. The only exception to this general rule would be if you file pension or excise tax returns. However, if you fill out a 1099 for a contractor, you would then need to provide your SSN on the form, which may not be desired.
EINs For Businesses
Although you may not need a federal tax ID for your business, applying for one is free and it simplifies the process of opening a company bank account and applying for financing. In this respect, a tax ID is like insurance: you may never need it, but if you do, you’ll be glad that you took the initiative.