An Employer Identification Number (EIN), also referred to as a Federal Tax Identification Number, is a unique and secret nine-digit number allotted by the Internal Revenue Service (IRS) to businesses operating in the region of the United States. This number is used to identify businesses for tax purposes and is essential for companies to conduct various financial and legal transactions. Whether you are starting a new business, appointing employees or creating a business bank account, obtaining an EIN is often a necessary step.
This article will discuss in-depth exploration of the Employer Identification Number, including its purpose, how to obtain one, who needs it, and its various applications.
Understanding the Employer Identification Number (EIN)
An EIN is basically the business equivalent of a Social Security Number i.e. SSN for individuals. The IRS uses EINs to track a company’s tax obligations and filings. EINs consist of nine digits formatted as XX-XXXXXXX. Businesses use them for filing tax returns, hiring employees, and opening bank accounts.
Why is an EIN Important?
The EIN serves multiple critical functions for businesses. Some of the key reasons why an EIN is important include:
1. Tax Filing and Reporting
- Businesses must use their EIN to report and pay federal taxes.
- It is required for filing business tax returns, payroll taxes, and excise taxes.
2. Hiring Employees
- Employers must have an EIN to report wages and employment taxes to the IRS.
- The EIN is required to set up payroll systems and comply with state and federal employment tax obligations.
3. Opening a Business Bank Account
- Most banks require an EIN to open a business checking or savings account.
- It helps businesses separate personal and business finances.
4. Establishing Business Credit
- Lenders and credit agencies use EINs to track a business’s credit history.
- A secure and powerful business credit profile can help secure financing and business loans, also ensure the financial stability and company’s economic growth.
5. Applying for Business Licenses and Permits
- Various local and state government agencies require businesses to get an EIN before issuing permits or licenses, because it is an essential requirement for it.
6. Business Expansion and Legal Compliance
- An EIN is often necessary when forming partnerships, corporations, or LLCs.
- It helps in compliance with federal and state regulations.
Who Needs an EIN?
Not all businesses need an EIN, but many do. The IRS mandates that businesses meeting any of the following criteria must obtain an EIN:
- Businesses with Employees – Any business that hires employees must have an EIN to report payroll taxes.
- Corporations and Partnerships – All corporations (C-corp and S-corp) and partnerships require an EIN, even if they have no employees.
- Multi-member LLCs – LLCs with more than one member need an EIN for tax reporting purposes.
- Businesses That File Excise Taxes – Companies that pay federal excise taxes, such as alcohol, tobacco, and fuel, require an EIN.
- Nonprofit Organizations – Nonprofits must obtain an EIN to apply for tax-exempt status and comply with tax regulations.
- Estate and Trusts – Estates handling assets or trusts generating income need an EIN.
- Businesses That Change Ownership or Structure – If a business structure changes (e.g., a sole proprietorship becoming a corporation), a new EIN is needed.
How to Apply for an EIN?
Applying for an EIN is a straightforward process that can be completed through multiple methods:
1. Online Application
- The fastest and most convenient way to apply for an EIN is through the IRS website.
- The application is free and typically processed immediately.
- Available only for businesses in the U.S. or U.S. territories.
2. Mail Application
- Businesses can submit Form SS-4 (Application for Employer Identification Number) by mail.
- Processing time takes about four weeks.
3. Fax Application
- Form SS-4 can be faxed to the IRS for quicker processing.
- EINs are usually issued within four business days if the application is completed correctly.
4. Phone Application (for International Applicants)
- Businesses outside the U.S. can apply for an EIN by calling the IRS.
- The representative will assign the EIN over the phone once verification is complete.
Cost of Obtaining an EIN
Obtaining an EIN is completely free if done directly through the IRS. However, some third-party services charge fees to assist with the application process.
How Long Does It Take to Get an EIN?
- Online applications: Immediate issuance of EIN.
- Fax applications: Typically processed within four business days.
- Mail applications: This may take up to four weeks.
- International phone applications: Processed immediately during the call.
Using Your EIN
Once an EIN is assigned, businesses must use it consistently for tax filings and other official transactions. Some key ways businesses use their EIN include:
- Filing annual and quarterly tax returns.
- Withholding and paying payroll taxes.
- Opening financial accounts and securing business loans.
- Complying with state and local licensing requirements.
- Establishing business credit with vendors and financial institutions.
EIN vs. Other Business Identifiers
EIN vs. SSN
- An EIN is for business entities, while an SSN is for individuals.
- Sole proprietors may use their SSNs for tax purposes unless they hire employees or establish an LLC or corporation.
EIN vs. ITIN (Individual Taxpayer Identification Number)
- ITINs are used by individuals who do not qualify for an SSN but need to file taxes.
- EINs are strictly for business identification.
EIN vs. State Tax ID
- An EIN is issued by the IRS at the federal level.
- A State Tax ID is issued by state tax agencies and is needed for state tax obligations.
Updating or changing an EIN
If you want to change the business information or want to update something, then you should be made with the IRS. However, in some cases, a new EIN may be required, such as when:
- A sole proprietorship incorporates or forms a partnership.
- A business is inherited or sold.
- A business undergoes a legal structure change.
Conclusion
The Employer Identification Number (EIN) is an essential tool for businesses operating in the United States. Whether you’re a small business owner, a corporation, or a nonprofit organization, having an EIN is crucial for tax compliance and various tax transactions, financial transactions, legal operations and other financial and tax-related communications. Understanding the importance of an EIN, how to apply for one, and how to use it properly can help ensure your business runs smoothly and remains in compliance with IRS regulations.
Frequently Asked Questions
1. Can a business have more than one EIN?
No, a business entity should only have one EIN unless it undergoes structural changes requiring a new one.
2. Does an EIN expire?
No, an EIN does not expire and remains with the business for its lifetime.
3. Can a sole proprietor get an EIN?
Yes, especially if they plan to hire employees or operate under a business name other than their legal name.
4. Can I use my EIN to apply for a business loan?
Yes, lenders often require an EIN to verify business identity and creditworthiness.
5. What happens if I lose my EIN?
You can retrieve your EIN easily by checking IRS correspondence and tax returns or by contacting the IRS directly.
