A business tax ID, also known as an employer identification number (EIN), is a unique identifying number issued by the Internal Revenue Service (IRS). It’s like a Social Security number but exclusively for your company.
The IRS requires an EIN for certain federal tax forms. Organizations such as banks and vendors may ask for your business tax ID number before they start to do business with your company.
Your company is growing up and it’s time to get a business tax identification number.
Why Do You Need a Business Tax ID Number?
Your small business needs an EIN or a business tax ID if you plan to:
- Open a business bank account
- File federal and state tax returns. (You may need a state EIN.)
If you’re in a business that collects excise taxes or is related to alcohol, tobacco or firearms, you need a business tax ID to file those reports to the government.
A sole proprietorship without employees doesn’t need an EIN. You will file your business income taxes with your personal tax return, using your Social Security number as your business taxpayer ID.
When is a Business Tax ID required?
Per IRS regulations, an EIN will be required if:
- Your business hires employees.
- The business type changes to a C corporation, limited liability company or partnership.
- The company withholds taxes on income earned by nonresident aliens.
- You set up a Keogh plan (a tax-deferred pension plan for self-employed people) or a solo 401(k) plan.
- The business works with trusts, nonprofit organizations, real-estate mortgage investments and estates.
- You use independent contractors and issue Form 1099s.
Apply for an Employer Identification Number in 3 Simple Steps
Getting an EIN is simple and takes a few minutes. While the IRS accepts applications by mail, telephone or fax, the agency prefers that people apply online.
- Go to the IRS website to begin the application. After answering some questions, you immediately will receive a unique EIN for your company. This number can never be canceled.
- For safekeeping, save a copy of the confirmation letter on your computer and print out a hard copy to store with your company’s other legal documents.
- Recent changes by the IRS will require you, as the responsible party making the application, to provide your name and Social Security number.
What Are the Advantages of an EIN?
Prevents Identity Theft
An EIN reduces the chances of your personal identity being stolen. Because an EIN is for your company, you can keep personal transactions separate and not use your Social Security number for business purposes.
Having a business tax ID indicates that you’re serious about your business, and you aren’t just doing it as a side gig or hobby. Others will view you as a more legitimate business owner and be more receptive to working with you.
Increases Trust With Vendors
Suppliers, wholesalers and distributors often require an EIN before even agreeing to sell to a business. Having an EIN indicates you are a responsible person with a credible business that pays its bills on time.
Establishes a Credit History
Credit reporting agencies will use the EIN to set up a distinct commercial credit history for your business. It will be separate from your personal spending habits and any credit issues you might have had in the past.
Maintaining a good credit history for your company will make it easier to get better rates on loans and credit cards for your business.
Makes It Easier to Hire Employees
Having an EIN is essential before you start hiring employees. It’s easier to set up an outside payroll service to handle the taxes and accounting chores that come with paying employees.
What Happens if You Lose a Business Tax ID Number?
While most people can recite their Social Security Number from memory, a business tax ID isn’t so easy to remember. It isn’t like you’ll use it every day.
Say your bank requires this number before it can process your loan application — and you don’t know where to find it. Not to worry: Your business tax ID is easy to find.
3 Ways to Track Down Your EIN:
1. Confirmation Letter
When you apply for an EIN, the IRS immediately issues a confirmation letter. This letter has information that identifies your company and its business tax ID. It’s an important document, so safely store it along with other crucial company documents, such as your articles of incorporation.
2. Other Paperwork
In addition to a confirmation letter, your EIN appears on other types of paperwork related to the operations of the business, including:
- Business permits and licenses
- Previous federal tax returns
- Your company’s credit report
- Bank account statements for the business
- Old loan applications
- Payroll data, such as 1099 forms for independent contractors
3. Contact the IRS
The IRS maintains a Business and Specialty Tax Line especially for the purpose of locating your EIN. Be prepared for the IRS representative to ask you for specific identifying information about the company before giving out the EIN.
When Do You Need to Change Your EIN?
Most changes in your business won’t require a new EIN. Even so, some instances might come up that will need a different EIN.
- Changing a business type, like from a sole proprietorship to a partnership or corporation, will require a new EIN. However, you won’t need a new EIN for simply changing the name or address of the business.
- If the Secretary of State of your location issues a new charter for the corporation, you will have to file for a new EIN.
- A sole proprietorship undergoing bankruptcy requires a new EIN.
- An ownership change of the business entity will need a new EIN to show the transfer of assets. If you’re operating as the sole proprietor and you inherit a company, file for a new EIN.
Obtaining an EIN for your business is an important step. You will need it for tax forms, licenses and business loan applications. Moreover, creditors and vendors will have more respect for you because having an EIN shows that you’re serious about your business.