What is an Employer Identification Number?
An Employer Identification Number (EIN) is a unique number assigned to your business by the IRS that is used to identify the tax accounts that are required to file various business tax returns. Some other less common names for an EIN are a "FEIN," "E.I.N. Number," or a "Federal Tax ID", which all refer to the same number. The purpose of an EIN is to identify a business entity for taxation, much like an SSN would identify an individual or sole proprietor. Unlike SSNs, EINs are considered to be less sensitive, so they are often used by entrepreneurs as their identification on government forms and official documents since there is much less risk of identity theft.
Who needs an EIN?
While there are many benefits for almost any small business to apply for an EIN, there are some cases in which a business will be required to have one. If you answer yes to any of the following questions, you are required to have an EIN.
- Have you hired, or plan to hire, employees?
- Is your business incorporated as an LLC, partnership or corporation?
- Do you plan on opening a business bank account and establishing business credit?
- Do you file employment, excise, alcohol, tobacco or firearm taxes?
- Do you withhold taxes on income to a non-resident alien?
- Do you plan on changing your organization type?
What if I don't hire employees? Do I still need an EIN?
Once you have incorporated your business, it becomes its own legal entity with you as its employee. You may still use your SSN to identify your business, but you must also have an EIN so the IRS can track the business, ensure it collects payroll tax, and stay in compliance. If you plan to run your business as a partnership, you will also be required to have an EIN because the social security numbers of both partners cannot be used as identifiers.
Does a single member LLC benefit from an EIN?
A single member LLC can also file for an EIN for their business, although generally it is not required. A single member LLC is considered a disregarded entity by the IRS and is treated as a sole proprietorship, so all income is passed to the owners. However, you can use either your SSN or EIN when receiving 1099-MISC income. Just make sure to report all these 1099-MISCs under your Schedule C since they all relate to your LLC business income.. This can provide added protection for your SSN, especially in cases where you may be providing W-9s to multiple businesses. If your LLC purchases property, or pays excise taxes, you may also use your EIN.