Have you ever wondered why you need an EIN for your small business? Perhaps you’re not even sure what it is. You just know that every resource you come across tells you to get one.
Many people with “small” businesses don’t have an EIN. This is a big mistake, one that you can easily avoid. Keep reading to find out what the big deal is about this nine-digit number.
What is an EIN?
EIN stands for Employer Identification Number. This number is a way for the government to identify you as an employer. This number can be thought of as a social security number for your business. Many people mistakenly say EIN number, but the N stands for a number, so you can drop this word off the end.
This number is issued by the IRS. Simply go to the website, www.irs.gov, and you can apply online. It’s free to apply for one, and you will be issued one immediately as long as your application is good. The application is easy and only takes a few minutes to complete.
EINs are always nine digits long. The number starts with two numbers preceded by a hyphen, preceded by the last seven numbers. Ironically, this makes it even more like a social security number.
Do You Need an EIN for Your Business?
The odd thing about EINs is that you need one even if you don’t have or intend to hire employees. Contrary to the name, EINs identify you more for tax purposes than keeping up with employees. These numbers are also sometimes called Federal Tax Identification Numbers, or TINS. This is probably a more accurate name, although EIN is more universally accepted.
As you know, if you own a business, you must pay taxes. Therefore, you need a tax number. It’s safe to say if you own a business, you need an EIN.
There may be a few exceptions, so for that reason, the IRS has a set of criteria you can use to specifically determine if you need an EIN. If any of these criteria apply to you and your business, you need one:
- You have employees.
- Your business is a partnership or corporation.
- You must file any of these returns: Employment, Excise, Alcohol, Tobacco, and Firearms.
- You withhold taxes from a non-resident.
- You have a Keogh plan.
- You may also need one if your organization is a trust, estate, plan administrator, tax-exempt organization, real estate investment conduit, or a farmer’s cooperative.
Notice that the primary classification that is exempt from all the criteria above is a sole proprietorship. That’s because, with this classification, you can essentially use your social security number. However, you can get an EIN for a sole proprietorship if you want to.
Now You Know the Legal Reasons, But What Else Should You Know?
An EIN is your foot in the door for many business relationships. This is because so many entities you’ll do business with are going to ask for this number. Banks, credit card processors, and even vendors may ask for this number; without it, you won’t be able to do business with them. Having an EIN essentially makes your business legit.
Other reasons you can benefit from having an EIN include:
- It makes you look more professional rather than a “hobbyist”.
- Allows you to build business credit instead of relying on your personal credit history.
- It adds a layer of protection from identity theft since you won’t have to use your social security number.
Don’t Hesitate to Get an EIN
If you’re legally obligated to have it, there is no question about obtaining an EIN. You’ll want to be in compliance with the IRS. However, if you aren’t legally obligated, you should strongly consider getting one for all the reasons stated above.
Even if you never use your EIN, having one is beneficial. There are no consequences to not using it, so as the old saying goes, it’s better to be safe than sorry, and therefore, having an EIN is beneficial.