What Is an EIN Number and Why Is it Important for Taxes?

Photo Courtesy: Dan Retea/iStock

When you start a small business, there are plenty of documents to complete and applications to file. One of many important documents you may need for your small business is a letter from the IRS establishing the employer identification number, or more commonly known as an EIN, of your business. An employee identification number (EIN) is an important form of identification for businesses. Because it works kind of like a social security number, it’s used for filing taxes, building business credit across accounts, applying for permits and more.

EINs are required on several business documents, but the IRS does not require every business to have one. How can you determine whether your business needs an EIN? If you need one, how should you use it?

What Is An EIN?

In many ways, EINs are similar to a social security number for a business or a person operating as a business. EINs are nine-digit numbers, and each one is unique. A dash separates the first two digits from the last seven digits when written out. 

Photo Courtesy: Bloomberg/Getty Images

The Internal Revenue Service (IRS) handles issuing new EINs. The IRS created EINs as a unique way of identifying each business for taxes. Just as taxes for individuals connect to social security numbers, taxes for businesses and individuals operating as businesses connect to EINs.

What Businesses Need EINs?

Even if it is a sole proprietorship, any business can apply for an EIN. If you are self-employed, you can apply for an EIN. If you’re the CEO of a restaurant with franchises all around the country, your business can have an EIN. There are no minimum requirements for getting this identifying number.

While some sole proprietorships or small businesses can get by on just the owner’s SSN, some businesses must have an EIN. The IRS designates that certain businesses need an EIN before starting to do business. The E in EIN stands for employer, and if a company hires employees, pays wages, or withholds tax deductions on employees’ paychecks, the business must apply for an EIN. Due to this requirement, most small businesses that are not sole proprietorships are legally required to apply for and use an EIN. Payroll software and companies that complete payroll on behalf of other businesses often ask for an EIN before accepting a new account. 

When a business is formally registered as a corporation or a partnership, the business needs to maintain an EIN. EINs are not optional for businesses that file excise, alcohol and tobacco, employment, or firearm taxes. This includes nightclubs, any business that has employees, and manufacturers. Non-profit organizations and businesses that handle certain assets like real estate, trusts, and cooperatives need EINs.

How Do Small Businesses Use EINs

Small businesses’ primarily use EINs for employment paperwork (like W-2s and 1099s) and income tax returns. On the back end, the IRS compares your taxes with information from 1099s, payers, and bank accounts attached to your EIN for accuracy. 

Photo Courtesy: Karen Bleier/Getty Images

Even if your business is not required to have an EIN for tax purposes, it may still be in your best interest to apply for one. Since each business has a unique EIN, many companies use these numbers in intake processes. To apply for a loan or grant, you may need to supply an EIN. Some banks require an EIN to open up a business banking account. 

Beyond these needs, many freelancers and sole proprietors apply for EINs for security reasons. If you are a freelancer that will earn $1,000 per month over the course of a year for one client, that client may want to issue you a 1099 at the end of the year. To issue a 1099, the business will have to include a tax identification number for you. To make this process easier, many businesses ask contractors and freelancers to complete tax form W-9 at the beginning of the business relationship, and to fill out this form you will either have to supply your social security number or an EIN. Many sole proprietors get an EIN so they do not have to give their social security number to multiple clients who may not have adequate data security. 

How to Get an EIN for Your Small Business

Getting an EIN is a very simple process. You can apply online for an EIN, and you will often receive a number and an official document from the IRS within minutes of applying. 

Any business may apply for an EIN, but the principal location for the business has to be in the United States. The person applying for the EIN must have a tax identification number of their own. If you are the owner of a company, you may choose to use your own social security number to apply for an EIN on behalf of your business. In other cases, a business working on your behalf may use its own EIN to apply for an EIN for your business. 

The only limitation on applying for EINs online is the number of EINs you apply for each day. You can only apply for one EIN per day as a business owner. Keep this in mind if you own multiple businesses. 

How to Change Your EIN

An EIN is unique and permanent, and it will always serve as a representation, current or historical, for the entity it was created on behalf of. For this reason, the IRS does not allow for changing EINs, but there are some instances when a business may need to create and begin to use a new EIN. You follow the same process for applying for an initial EIN if you need to create a new one. 

If a sole proprietorship changes structure and becomes a corporation or partnership, you need to apply for a new EIN for the new entity. Name changes, location changes, and opening new branches of a business do not require the creation of a new EIN.

Quick Ways to Find Your Own EIN

If you’re trying to find your own EIN, there are likely many documents in your possession that could potentially help you find it. Emails from government agencies, such as the IRS, might include it. You also may have received an electronic receipt from the IRS after your application for an EIS was approved.

Similarly, any business documents you have, such as loan applications, permits or tax returns, may also include the number. Keep in mind that taxpayer identification numbers (TIN) include social security numbers (SSN), individual taxpayer identification number (ITIN) or EINs. If the form is for your business, odds are good that the TIN is also your EIN. Both TINs and EINs are also sometimes referred to with the word “federal” in front of them (FTIN and FEIN).

Who to Contact if You Can’t Find It

If you don’t have any documentation, digital or otherwise, that includes your EIN, you’re still not out of luck. The first place to try is the bank your business uses to manage its finances. You need an EIN to open a business account, so your bank likely has the number on file. To get it, you’ll likely need proper documentation to show that you’re the owner of the business account. Once you show your credentials, however, the bank should be able to provide you with the EIN you gave them when you opened the account.

Photo Courtesy: Bloomberg/Getty Images

Finally, you can also contact the IRS directly to get your EIN. By visiting your local IRS chapter or calling 800-829-4933, authorized callers — including relevant sole proprietors, members of a partnership, corporate officers, trustees, estate executors and more — can confirm their business’ EIN and other information. Be prepared to prove that you are the owner of the business or otherwise associated with it beforehand.