Regardless of how small or big your business is, running a business is a massive undertaking. There are many different tasks and variables to manage at once, and it can be hard to make sure it all gets done if you’re working alone. That’s why it’s helpful for a business to recruit employees and build a team.
Even if you’re the sole proprietor and owner of your business, you don’t have to run it alone. Hiring teams and employees is an essential part of starting a business, and it gives your company a chance to reach even greater heights. The business doesn’t have to depend on you and only you.
There’s a lot of responsibility that comes with taking on employees, however. You are trusting an employee to take the initiative and work for the good of the business, but the employee is also trusting you to invest in them and give them a reason to work.
The first step for meeting your responsibilities to your employees is to acquire an employer identification number (EIN). This will help you take care of your employees and comply with many federal regulations concerning employment.
What is an Employer Identification Number?
An employer identification number, or EIN, is one of the most essential parts of having a small business. The EIN is a nine-digit number unique to your small business, no matter what state or where you’re located in the United States. You register for an EIN with the Internal Revenue Service (IRS), which will assign a number to your company for free.
While there may be multiple businesses with similar names, no two businesses share an EIN. You’ll be using this number a lot for handling wages and taxes and submitting other paperwork to the government. While your EIN will be the primary identifier for your company with the federal authorities, you may need separate state tax ID numbers for your state taxes.
Which Business Entities Need an EIN?
Any business in the United States or the U.S. Territories can apply for an EIN, but the specific need depends on the type of business entity. Most businesses need an EIN, often whether or not they want to hire employees.
Sole proprietorships usually won’t need an EIN, as the owner of such a business can use their social security number instead of an EIN. The business is not a separate legal entity from the individual in a sole proprietorship, so the IRS doesn’t require a unique nine-digit number other than the SSN.
Any corporation will need to apply for an EIN, even if the corporation won’t have any employees. Corporations are distinct legal entities separate from their owners and stockholders, and the EIN allows the IRS to identify them directly.
S-corporations are small corporations that file for a special tax status with the IRS, whereas regular corporations are known as c-corporations. This status allows the corporation’s owners to file their income as their own personal income instead of paying taxes first according to the corporate tax rate. S-corporations need to apply for an EIN as well.
A limited liability company (LLC) business entity will generally only need an EIN if it has multiple members. An LLC with only a single member and no employees does not require an EIN because the IRS can effectively treat it as a sole proprietorship.
Multi-member LLCs will need an EIN. If you file, you will also need an EIN to have your LLC taxed as a c-corporation or s-corporation.
Partnerships, another common small business entity, also require that the owners register their business for an EIN.
How to Apply for an EIN?
While obtaining an EIN is free, and there are a few options to obtain your EIN, it’s important to understand how to apply for an EIN. You can file your EIN application in one of three different ways, and the path you choose will determine how long it takes for you to receive your EIN.
Keep in mind that the IRS now will only register one EIN per responsible party per day. This means that you, as the responsible party for your business, can’t apply for multiple EINs simultaneously. This also means that, however you file for an EIN, you will need to be able to prove who you are and that you are a legally responsible party for your business entity.
The most convenient and straightforward option might be to apply for an employer identification number online. You’ll need a valid Taxpayer Identification Number (EIN, ITIN, SSN) to identify yourself as the responsible party for your business.
If you apply for an EIN online, you must complete the application in one session, and you’ll receive an EIN immediately after your information is validated during the online session.
Don’t panic if you receive an error message from the EIN assistant saying, “we apologize for any inconvenience” and failing to provide you with your assigned EIN. This doesn’t necessarily mean there is anything wrong with your application, but only that the online system can’t process it. You will likely need to file Form SS-4 by fax or mail instead.
Suppose the online option doesn’t work for you or you simply prefer to receive the paperwork directly by fax. In that case, you can fax in your completed form SS-4, Application for Employer Identification Number.
If you apply using a fax, you’ll want to check online and make sure you use the appropriate and up-to-date fax number. If you also provide your own fax number, you’ll receive a fax containing your new EIN within four business days.
A third option is to apply by mail. This is a slower process, but it works perfectly well if you’re not in a hurry. Make sure your SS-4 form is totally complete and mail it to the proper IRS office to be processed. You should get your new EIN in the mail in four weeks or less.
If you want to get your EIN processed quickly, but you don’t feel confident trying online, you can also register by calling the IRS Business and Specialty Tax Line for telephone assistance.
Call 800-829-4933 on a weekday between 7:00 a.m. and 7:00 p.m., and an agent will complete the application for you over the phone. You should have your new EIN by the end of the conversation.
How Much Does an EIN Cost?
It is free to apply for and receive an EIN. There should be no cost at all for any option beyond the normal costs of mail. You might need additional information to file by fax or mail, but there is not a separate filing fee.
Why Is an EIN Important?
Your unique nine-digit EIN is a necessary expense for several reasons. Beyond meeting legal requirements, it can help business owners run their businesses and take advantage of new business opportunities.
An EIN is important to have if you want to make a business banking account. Sole proprietors may open a business banking account using a social security number, but otherwise, the bank may require an EIN to open an account for the specific use of your business, as well as other additional documents.
An EIN will also help with establishing business credit and applying for larger loans. When you apply for credit, your EIN will show on your business credit report, and lenders will use your EIN to find your business credit history.
Lenders often expect applicants to have a business banking account already, and they will certainly check your business credit using your EIN before deciding to help you with funding.
You’ll definitely need your EIN as your federal tax identification number when it comes to your tax returns. If your business entity files a tax return as a separate legal entity, then your EIN will be necessary, and you might face financial penalties without one. The EIN is also important for withholding taxes on income long before the actual tax return.
If you run a nonprofit entity eligible for tax-exempt status, then you’ll need an EIN for that application as well, even though you won’t be paying taxes through that business entity.
You’ll also need an EIN if you plan to hire employees. Not every business needs employees beyond the owners, but if you plan to grow your business, you will eventually need some help. Then you’ll need the EIN to handle their tax withholding and to set up payroll.
Most businesses will need an employer identification number sooner or later, but a lot depends on your business entity and your hiring plans. If you’re unsure what to do or how to go about the process, consult with an accountant and get the professional help you need to set your business on solid footing.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.