What is an EIN, and why do I need it for my small business?
Running a small business can be incredibly fulfilling and exciting, but a few key components have to be completed before you can let your creative juices flow. Whether you operate as an LLC, corporation, or a sole proprietorship, you’ll want to make sure your finances are in order. While filing taxes and paying your bills on time is great, most new businesses must also request an EIN shortly after they formalize their company.
Issued by the IRS, an EIN (or employer identification number) is similar in theory to a Social Security Number—your business and only your business is identified by this nine-digit number, and it can be utilized in a variety of circumstances to help a new business to thrive. While most businesses can benefit from having an EIN, it may not always be necessary, although you can reap some rewards even if you aren’t required to have one. Let’s take a deep dive into this number and learn more about what it can do for you.
What is an EIN?
An employer identification number is a unique nine-digit number issued to new businesses by the Internal Revenue Service. It’s used when you file your state and federal taxes and is as important to a business as a Social Security Number is to an individual. Your EIN will be specific to your business entity and can be used with vendors, clients, and may be used when you apply for a business bank account.
You may hear others refer to an EIN as a Federal Tax Identification Number or a Federal Employer Identification Number, but these are the same as an EIN. Easy to obtain, business owners can complete Form SS-4 from the IRS and receive their EIN in about 5 weeks. Sole proprietors will need to provide their legal name while business owners need to include their business name, and all individuals will need to designate their business structure.
Additional information is required on the Form SS-4, including your Social Security Number or TIN, and the reason for the application. An existing business may apply for an EIN based on certain organizational changes, but it’s recommended that you submit your EIN application during the formation of your business. Once you’ve received your Federal Tax ID, you can use it on your business tax returns, applications for business licenses, and all other forms related to your organization.
Why do I need an EIN for my small business?
In general, most types of businesses are required to have an employer identification number. Sole proprietors who are planning to hire employees, filing for bankruptcy, or who want to offer Keogh retirement plans must apply for this number; however, if these situations don’t apply to you, you may choose to continue using your Social Security Number on your income taxes.
An EIN can be incredibly beneficial beyond tax purposes as business owners can utilize this nine-digit number to their advantage. Ideal for nonprofit organizations, S corporations, and even independent contractors, a FEIN can offer a range of benefits, including:
1) Positioning you to hire staff members
While an EIN may initially seem like it’s for tax purposes only, it can come in handy if and when you decide to hire employees.
In the Golden State, for example, you’ll have to obtain an EIN before hiring your first employee in California, so it’s smart to apply for this nine-digit number when you first start your business. Those who are self-employed may think they’ll never be in a position to expand their organization, but it’s smart to have this number available should things ever change. Your EIN will allow you to easily set up your payroll system and bring people onto your team without much delay.
2) Helping you during tax time
As April nears each year, filing taxes is often on the minds of many business owners. If you run a corporation or a limited liability company, likely, you’ve already obtained your EIN online from the IRS. However, if you haven’t, you could face financial consequences. Those who cannot file their taxes on time due to a lack of an EIN may find they are penalized for a late return. Instead of waiting until the last minute, it’s highly recommended that you get your FEIN as soon as possible.
If you’re self-employed and would rather not have to fill out the IRS form required to get your EIN, you may want to reconsider. Many experts note that sole proprietors who deduct business expenses on their tax returns (like a home office, for example) may be at a greater risk for an audit. Instead of worrying about this situation in the future, an EIN may help you avoid it altogether. Unless you’re running a tax-exempt organization, you’ll want to apply for your EIN well ahead of tax time.
3) Aiding you in applying for a business license
Depending on the state in which you’re organizing your startup, you’ll likely need to apply for a general business license before you can officially conduct business. Many industries will require additional types of permits and licenses as well, such as hairdressers, restaurants, and those who start a landscaping business.
To complete the application process for these documents, you’ll need to have an EIN. Check with your local government agencies to learn more about the licenses and permits you’ll need, and make sure to have your employer identification number handy when it comes time to complete the paperwork.
4) Allowing you to open a business bank account or apply for a loan
Nearly all types of businesses end up opening a business bank account to separate their income from their personal finances. While some financial institutions are a little more relaxed, especially when it comes to sole proprietorships, others will absolutely require your EIN to start the process. If you want to apply for a business credit card, you’ll need this number to complete the application. In most cases, business owners will also need to provide additional information when they open their account, including the business location and date it was formalized.
Running a business can be very expensive, and sometimes, business owners want or need to apply for a loan. Whether you’re hoping to expand operations or you need the funds to secure retail space, the process of applying for a loan is often sped up when you have an EIN. In short, having this number shows the bank that you are taking this venture seriously, that you’re completing all of the recommended steps involved in forming a business, and that you have a business bank account you can use to repay the loan.
5) Establishing your credibility as an independent contractor
If you’re starting a corporation, there’s no doubt that you have to obtain an EIN to do just about any of the formal tasks that are required. Independent contractors, however, are in a much different boat. For some, working as a freelancer is a part-time gig or something they occasionally do to bring in a little extra money. Others who want to make their chosen line of work a legitimate way of earning an income may sometimes feel as if they’re lumped in with other casual freelancers.
A great way to distinguish yourself as a serious business owner is to apply for an EIN. This lets potential clients know that you’re putting as much thought and energy into your business as you can and is very attractive when trying to capture new business. Not only will you be able to provide your EIN whenever a client asks you to fill out a 1099 tax form as a show of your commitment, but you’ll also be able to keep your Social Security Number a little more private.
6) Building your business credit
Finally, as your business grows and your financial needs shift, you’ll want to have an easier time working with vendors or obtaining loans from your bank. Just like each person with a Social Security Number has a personal credit history, your business has one that’s linked to your EIN. Every time you pay a business-related bill on time, your business credit will strengthen. Whenever you apply for a loan using your Federal Tax Identification Number, you’ll have a better chance of approval if your financial habits are favorable.
Other business owners may find that applying for an EIN can benefit them in alternative ways, too. A non-resident alien who wants to start a business in the United States can do so using an EIN, even if they don’t have a Social Security Number. They will, however, need to have an Individual Taxpayer Identification Number (or ITIN) to apply.
Is an EIN optional?
Depending on the type of business you operate, an EIN might be an optional step when forming your organization. If your business doesn’t require an EIN, it’s best to weigh your options and consider if you could benefit from any of the advantages that an EIN can bring. If nothing else, using an employer identification number is a great way to help protect you from identity theft and helps to keep your SSN more secure.
If you’re still forming your small business and want to apply for an EIN, visit the IRS website to get started. You can complete the application fairly easily and will receive your Tax ID Number in about 5 weeks.
While you’re checking things off your to-do list, don’t forget about enrolling in small business insurance to protect your business in the event of an unexpected situation. Huckleberry makes it easy to get a quote online and enroll in a policy with just a few clicks.