Understanding EINs
Learn when and why an Employer Identification Number (EIN) is the right plan
What is an Employer Identification Number (EIN)?
An Employer Identification Number (EIN), is a specific nine-digit number that identifies your business for tax purposes to the Internal Revenue Service (IRS). It is similar in function to a social security number for your business. An EIN is required in order to operate and open a bank account for your business.
You can apply online for this by filing a Form SS-4 on the IRS website. The application process takes about 10 minutes and you can get your number assigned immediately.
When Does My Business Need an EIN?
If any of the following apply to your business, you will need to get an EIN:
- Your business has employees
- Your business is a partnership or corporation
- Your business files excise taxes
- Your business withholds taxes for nonwage income paid to a nonresident alien
- Your business has a Keogh Plan
There are some other situations when your business will need to get an EIN, such as if it is involved with certain organizations.
What are the Benefits of an EIN?
The five benefits of operating under an Employer Identification Number relate to taxes, protection from identity theft, building credit, providing your organization with structure, and growth that results in hiring employees.
Dealing with business taxes and tax penalties
When it comes to tax day, you will want to make sure you have applied for an EIN. This is the number you will use to file your taxes for the business. Non-compliance with IRS requirements related to having an EIN could result in penalties.
The IRS may not accept your tax filing which could lead to paying a penalty fee for a late submission. Per the IRS, “the ‘Failure to file Penalty’ is 5% of the unpaid taxes for each month or part of the month that a tax return is late. The penalty will not exceed 25% of your unpaid taxes.”
Identity Protection
Identity protection is a hot topic in today's world with bad actors trying to capture people's personal information. Having an EIN for your business is an effective way to help lower the risk of identity theft as it keeps your social security number private. When dealing with vendors or clients, you will provide your EIN when doing business, adding an extra layer of protection to your personal information.
Qualify for more business loans and build business credit
Although it is not required, having an EIN when applying for a business loan can add credibility to your application. It may help speed up the process, lead to better interest rates, or lead to a higher loan amount being offered to you.
Provide structure for financial record-keeping
A business bank account is another way to keep your business and personal funds separate. Keeping these funds separate will allow you to keep track of your finances easier. This makes tracking, spending, and budgeting more efficient.
Most banks require an EIN to open a business account. With the business account, you can also have a debit or credit card which comes with its own benefits.
Hiring Employees
You may start a business on your own but find yourself needing to hire employees to keep up with the demand. You will need to have an EIN to hire those employees. It may be beneficial to obtain an EIN from the beginning even if employees are not being considered at that moment. By having an EIN upfront you will be able to set up a payroll system with no delays when it comes time to hire.
Does my EIN change?
Generally, your business will not need to change the EIN. You will use the same number throughout the course of your business. There are certain circumstances, such as a change in business structure, where you will need to obtain a new EIN. Those circumstances are provided below broken out by type of entity and can also be found on the IRS website.
Sole Proprietors
IF YOU
- are subject to a bankruptcy proceeding
- incorporate
- change to a partnership
- purchase or inherit an existing business that you operate as a sole proprietorship
Corporations
IF YOU
- receive a new charter from the secretary of state
- are a subsidiary of a corporation or become a subsidiary of a corporation
- change to a partnership or a sole proprietorship
- are created after a statutory merger
Partnerships
IF YOU
- incorporate
- recharacterize as a sole proprietorship
- end an old partnership and begin a new one.
Frequently Asked Questions (FAQs)
Is there a difference between an EIN, TIN, or FEIN?
No, there is no difference between an Employer Identification Number (EIN), a Taxpayer Identification Number (TIN), or a Federal Employer Identification Number (FEIN). They are all identification numbers for your business assigned by the IRS
Obtaining an EIN will benefit your business in the long run. It streamlines many processes and protects owners and managers from many liability or legal risks. In some cases, it's even required by the government to keep business transactions and personal occurrences separate.
Can I use my Social Security number instead?
You can only operate your business using your Social Security Number if acting as a sole proprietor. However, it is recommended to get an EIN for the business in order to keep business transactions separate from personal and to add a layer of protection against identity theft.
With that information, you should also consider that for each business entity you have you need a different EIN. This is because each entity is a different business just like each person receives a different Social Security number.
What happens if I never use my EIN?
There are no penalties or negative actions taken if you do not use the EIN you obtained. It is free to apply for one and there are so many benefits to consider for using one.
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