Phone numbers, driver’s licenses, credit cards…we’re in a constant swirl of digits that get us through everyday life. And if you’re a small business owner, you’ll likely need to add an Employer Identification Number (EIN) to the list.
EINs are necessary for paying taxes. They’re also a key tool for creating and obtaining business essentials like bank accounts and payroll, as well as certain licenses and permits — all of which are required for a successful, legal business venture. Furthermore, without one, you could face serious penalties and delays come tax time.
This week’s deep dive looks at employer identification numbers. Keep reading to find out if you need a tax ID other than your SSN, how to get one, and why they are essential.
What exactly is an EIN?
An EIN, or “employer identification number,” is basically a social security number for your small business.
This nine digit number is issued by the IRS for tax purposes and is unique to your particular business. Think of it like a thumbprint.
It can’t be transferred or used by anyone else and is specific to a single business at the time of registration. This means if your business structure changes, you’ll need to get a new one.
Forgot or misplaced your EIN? Dang that pesky seven-digit memory. Don’t worry: the IRS should have it on file and can remind you of it once you answer a few questions.
Don’t I already have a tax ID?
If an EIN is like an SSN, do you really need both?
Unless you are a sole proprietor or a single member LLC, the answer is yes — although any structure can opt for one.
Any business that has employees or operates as a corporation or partnership needs this additional tax ID in order to pay taxes and handle payroll.
Still not sure? The IRS has a series of questions to help you out. These questions pertain to:
- Whether or not you have employees
- Business structure
- What kind of tax returns you’ll be filing
- Tax withholding on income
- Keogh plans (Gesundheit!)
- Organization involvement
What are the benefits of an EIN?
On the surface, EINs may look like just another way to pay taxes. Which for the average citizen can feel like a booby prize. But before you roll your eyes, consider the other benefits of an EIN.
Applying for licenses and permits in order to legally operate your business? You’ll need an EIN.
Hiring employees down the road? An EIN in the back pocket will make that process smoother.
Looking to build credit for your small business to secure a loan? EIN’s got you.
Planning on opening a business bank account because you’re a savvy entrepreneur? Yup, get ready to whip out that EIN.
Lastly, one of the biggest (and least obvious) benefits of an EIN is identity protection. An EIN eliminates the need to give out your personal information (like a SSN) in association with your business. This is why some sole proprietors and single member LLCS may choose to get this additional tax ID even though they aren’t required to.
What about state tax ID numbers?
Now that you’ve wrapped your head around EINs, let’s talk about state income tax.
That’s right — the fun doesn’t stop with the IRS. If you’re applying for an EIN you will most likely need a state tax ID as well.
A state tax ID is required for small businesses since state and federal tax systems are separate. The good news is a state tax ID is essentially the same as an EIN. So you already know the drill.
The only difference is there is no central place to apply. And your state may or may not have state tax requirements. Did you know there are currently eight states that even don’t levy income tax? You’ll need to look up your state’s process and requirements for application. Who knows, it might inspire you to move your business for a tax break.
Just like registering your business, you may need to apply for multiple IDs if you operate in more than one state.
How do I apply for my EIN?
Chomping at the bit to obtain your shiny new employer identification number? Makes sense to us!
Luckily, applying for an EIN is as easy as a trip to the IRS website. There you will find different ways to apply. The online webform is the most convenient option, but you can apply by fax, mail, or even telephone if you’re international.
Be aware that you will need to complete the webform in one 15-minute sitting. So make sure you gather your information beforehand to make the process as smooth as possible.
Download form SS-4 for a preview of everything you’ll need.
Once you’ve submitted your application, your EIN will be generated immediately. It can be used for opening bank accounts and applying for licenses right away. However, it may take up to two weeks for your EIN to be entered into the IRS permanent record system. This can affect your ability to file or make payments electronically.
One last thing— EINs are free. So make sure you aren’t racking up start-up costs by paying an unnecessary fee to get one.
ID me, please!
It feels good to make it official. Especially if it means peace of mind when it comes to paying your taxes correctly and on time.
By obtaining your EIN and state tax IDs as soon as possible, you’ll ensure you’re ahead of the game and protecting your personal information. Not to mention it will come in handy for what’s coming up next.
Stay tuned for next week’s deep dive: Licenses and Permits.
Not sure which tax IDs you need? Reach out to KYN today for friendly, thorough tax advice for your small business.