Businesses that have paid employees are required to obtain a federal tax number known as an Employer Identification Number, or EIN. But some businesses without paid employees are required to have one as well. Let’s take a closer look at exactly what an EIN is, and when it’s required.
What is an EIN?
An Employer Identification Number identifies a business
in much the same way a social security number identifies an individual. If a business has an EIN, it is typically required on all tax-related forms. It also appears on employee pay stubs and W-2 forms, and employees must use it when reporting wages. Like an SSN, it’s a nine-digit number, but it’s formatted differently, with one hyphen, like this: XX-XXXXXXX. Any business that needs an EIN must have one, and only one, EIN.
Who Needs an EIN?
As the name suggests, any business that pays employees must have an Employee Identification Number. In addition, there are some business types
that need an EIN
even if they do not have employees. These include:
- Limited liability companies (LLCs) with two or more members
- Most partnerships
- Household employers
- Non-profits that apply for 501(c)(3) status
Under certain circumstances, businesses with an existing EIN may have to apply for a new one. This could be the case if you change the name of your business
, switch your business from a corporation to a partnership (or vice versa), or change the partners involved with your business.
In general, sole proprietorships without employees do not need an EIN. However, in some cases, people who provide accounting, engineering, architectural, health, law, actuarial, or performing arts services could be considered “personal services companies” which require an EIN.
EINs may also be required
for some trustees or fiduciaries, such as:
- Irrevocable trusts, including testamentary trusts (an EIN is generally not required for revocable living trusts)
- Keoghs and IRAs
- Estates of deceased persons (most often when there is probate)
- Farmers’ cooperatives
- Real estate mortgage investment conduits
- GNMA and FNMA pools
- Guardianships, receiverships, conservatorships, and escrow accounts
- Employee benefit health and retirement plans
Some independent contractors or sole proprietors choose to obtain an EIN even when it’s not required
. One reason is so they can use the EIN instead of their social security number when completing paperwork for their business – which could help lower their risk of identity theft. Another reason is that an EIN lends an appearance of professionalism and can make a business appear more credible with prospective clients. If you plan to hire paid employees in the future, it might also be a good reason to obtain an EIN before it’s required.
How to Obtain an EIN
The preferred method
for obtaining an Employer Identification Number for your business is to fill out an online EIN application
with the IRS. There is no cost to apply for or obtain an EIN. Once the application has been completed, you will be asked to validate the information via an online session, and an EIN is then issued immediately. Another option is to fill out Form SS-4
and either mail or fax it according to the instructions
. An EIN requested by mail will usually be delivered in about four weeks.
The applicant must provide information about the business and must be authorized to act on behalf of the business. Information requested during the EIN application process may include mailing addresses, social security numbers, any existing EIN the business may have, business structure and type, the state or country of incorporation, and the reason for applying. Businesses that have paid employees must state how many employees they either have, or expect to have, and when they will start paying employee wages.
Be aware of third-party websites that charge a fee for this service. Not only could they potentially be scams, but legitimate businesses that offer assistance with EIN applications ultimately don’t do anything you can’t do yourself directly through the IRS.
State Tax ID
Many states require businesses to obtain a state tax ID
in addition to an EIN. Each state has its own rules about who needs to obtain a tax ID, however Massachusetts and Rhode Island both require businesses to have a state tax ID. The process is similar to getting a federal EIN, but the specifics are different in each state. To register your business with the Massachusetts Department of Revenue and obtain a tax ID, visit https://www.mass.gov/how-to/register-your-business-with-masstaxconnect
. To register your business with the RI Division of Taxation and obtain a state tax ID number, visit https://www.ri.gov/taxation/BAR/
Obtaining an EIN is something that should be on every new business owner’s
to-do list when starting out, but it doesn’t need to be a chore. The IRS.gov website is a great place to start the process: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online