An Employer Identification Number (EIN) is essentially a social security number for businesses and is used primarily for tax administration purposes. Businesses need an EIN to pay employees, file business tax returns, open a bank account under the business name, and apply for business licenses.
What is an Employer Identification Number (EIN)?
An Employer Identification Number (EIN) is a nine-digit number assigned by the Internal Revenue Service (IRS) to identify businesses and non-profit organizations operating in the United States. This number is crucial for maintaining the separate legal existence of the entity apart from the personal affairs of the owner. It is also important when you are looking to expand your business and need to secure funds through means such as a business loan.
Employer Identification Number example
An EIN is formatted as XX-XXXXXXX. For instance, an example of an EIN might be 12-3456789. This number helps the IRS track the business's tax obligations and filings. It's unique to each business and once issued, it is never reissued or reused by the IRS, ensuring that each business's financial and tax history is distinctly maintained under this unique identifier.
Why is an EIN important for businesses and other entities?
Having an EIN is crucial for any business as it allows the entity to hire employees, maintain compliance with IRS tax rules, and effectively separate personal and business financial activities. This separation is essential for protecting personal assets against business liabilities and simplifies aspects of business operations such as obtaining business loans, establishing credit terms with suppliers, and filing tax returns. It serves as an important step in legitimizing a new business and maintaining operational transparency.
Who is required to obtain an EIN from the IRS?
Entities that must obtain an EIN include:
- Incorporated entities under the Company Act, 2013.
- Partnership practices including Limited Liability Partnerships (LLPs).
- Sole proprietors who employ others.
- Trusts, involved in trading or business activities.
- Estates with operational business activities.
- Non-profit organizations and charitable trusts.
- Any business entity that registers for excise, alcohol, or tobacco operations.
How to get an Employer Identification Number
To obtain an EIN, entities can apply directly through the IRS's official website, which offers the quickest turnaround with immediate issuance. Alternatively, businesses can fax or mail completed Form SS-4 to the IRS. For entities outside the U.S., phone applications are also accepted. The process is free and straightforward, ensuring that businesses can quickly meet federal compliance requirements and facilitate their operations.
Benefits of an Employer Identification Number
The EIN provides substantial benefits including enabling business owners to open bank accounts in the name of the business, hire employees, and ensure compliance with IRS regulations. It also allows businesses to build credit profiles separate from the business owner’s personal credit. Furthermore, having an EIN enhances credibility with customers and suppliers who may prefer to deal with formally recognized businesses.
Closing your Employee Identification Number
Closing an EIN involves notifying the IRS to deactivate the business account linked to the EIN. This is typically done after the business has filed its final tax return and paid all owed taxes. The IRS requires a formal letter stating the reason for the closure, such as dissolution or the business ceasing operations, to finalize the process and prevent future tax liabilities.
Employee Identification Number vs. Taxpayer Identification Number (TIN)
An EIN is specifically used by business entities for tax filing and reporting purposes. A Taxpayer Identification Number (TIN), on the other hand, is a broader term that includes any type of number used to identify taxpayers, encompassing Social Security Numbers (SSNs) for individuals, and EINs for business entities. While SSNs are issued to individuals for personal tax purposes, EINs are allocated to businesses and other entities for their tax dealings. Both EINs and TINs are essential for ensuring that the correct tax information and liabilities are accurately recorded with the IRS.
Conclusion
An Employer Identification Number (EIN) is indispensable for businesses in the U.S., serving not only as a means to comply with IRS regulations but also as a tool for enhancing business credibility and operational capabilities. It facilitates a range of business activities, from opening bank accounts to applying for business loans, and hiring employees. Proper management and understanding of the EIN’s role and requirements can significantly contribute to the smooth functioning and growth of a business. Thus, securing an EIN is a critical step for any business starting its operations or expanding its reach in the marketplace.
