What is an EIN: A Quick Guide for Business Owners
Introduction to EIN
An Employer identification number (EIN) is a unique ID number issued by the Internal Revenue Service (IRS) to businesses for tax purposes. These numbers are used to conduct business, open business bank accounts, hire employees, deal with payroll taxes, and used for paying taxes for your business.
Understanding EINs can help businesses manage funds easier and allows for a more clear separation of money between personal and business funds. There are many advantages of having an EIN for your business and most of the time, if you are starting a new business and plan to hire any employees you will need to obtain an EIN during the formation process.
Who Needs an EIN
Essentially, any business that is planning on hiring employees and operates with multiple members will benefit from having an EIN. If you have a sole proprietorship, using an EIN will help with separating personal and business finances, as well as avoid having to list your personal social security number on tax forms and when dealing with outside vendors.
Tax exempt organizations such as certain non profits will also require an EIN. These can be obtained by applying online, but there are certain requirements that must be met. Only one EIN will be given out for each business name in a state, so when registering a business it can be a good first step to see if the name has been registered in the state before and plan accordingly.
Benefits of Having an EIN
Having an EIN gives your business a way to deal with payroll taxes, open a business bank account, and helps with business loans and credit. Unless you are operating the whole business yourself, you will need an EIN to be able to hire employees.
There is also the personal privacy aspect of using an EIN number. Having one eliminates the need to use your personal social security number for things such as opening a business bank account and can lower the risk of identity theft. Keeping your business funds and personal funds separate helps with bookkeeping and having clean accounting sheets, which protects the business from any mistakes that can be costly.
How to Get an EIN
Business owners can apply for an EIN online through the IRS website. It can vary in how simple the process is depending on if an EIN has been issued for a business previously, or if it is a brand new business name that has not had an EIN before. There are extra steps that must be taken if an EIN has been issued before for the business and it can get complicated or be a lengthy process.
A business filing service is a great option to deal with this for you, as the IRS has very strict regulations and steps that must be taken when going through this process. Having a service take care of this for your business can take the guess work out of it as they are experienced in this process and are able to deal with the long wait times when it is necessary to call the IRS for any problems or questions. Our experts deal with the IRS and other state offices everyday, and understand the nuances of their requirements.
Responsible Party
The responsible party in regards to an EIN application is the person or business entity in charge of the business. This person must provide their full name, and social security number to apply for an EIN. If the responsible party is a business entity, they must provide the EIN of the existing business on the application.
The IRS requires responsible parties to provide accurate and updated information such as address, business address, the business purpose, and state the business is registered in. Their database checks this before advancing so you must ensure all information is correct before submitting for an EIN.
Federal Tax Requirements
Every business is required to have an EIN to file tax returns, pay federal taxes, and hire employees. Even if you don't have an EIN and operate your business on your own, when it comes to taxes your business "EIN" will just be your personal social security number. This is why an EIN is an advantage as you will not have to disclose your personal identifying information and be able to use the EIN to protect yourself better from identity theft.
Having an EIN is also used by your business for paying employee taxes and returns, which is another advantage as you will not be listing your social security number on all your employees tax return forms. Obtaining an EIN is helpful to keep personal and business funds separate as well which is especially useful during tax time ensuring your business is kept separate.
Why Businesses Need an EIN
Many benefits of having an EIN for your business have been mentioned previously in this article. One of the most important aspects is if you are hiring any employees it will be required for you to get an EIN for your LLC or Corporation.
Business bank accounts, credit, loans, and taxes are all also a part of the EIN benefits. It's a good idea to obtain an EIN when first forming your business just in case you plan to expand at all and hire employees, that way when the time comes you don't need to worry about if an EIN has been issued already for a business with the same name in the past.
