What is EIN?

An Employer Identification Number (EIN) is a unique nine-digit number the Internal Revenue Service (IRS) assigns to identify a business entity for tax purposes. It is used by employers, sole proprietors, corporations, partnerships, non-profit organizations, trusts, and other entities. The EIN functions like a Social Security number for businesses, facilitating the IRS in tracking tax reporting. Example: 11-2345678.

What's the TL;DR?

An EIN is a crucial component for businesses in the U.S., assisting with tax reporting, regulatory compliance, and other operational activities. Understanding the purpose and process of obtaining an EIN is essential for business owners to ensure your companies are correctly identified and compliant with federal regulations.

  • Unique Identifier: An EIN is an exclusive nine-digit number issued by the IRS when a business first begins its activities. It functions like a Social Security Number (SSN) but for business purposes. Businesses can apply for an EIN in various ways, including online, mail, or fax.
  • Tax Purposes & Compliance: Used to identify businesses for taxes and compliance. It also helps separate business and personal financial information, which is especially important as your business ideally continues to grow and scale.
  • Various Entities: Applicable to employers, corporations, partnerships, non-profits, trusts, estates, and more.
  • Required For: Necessary for businesses with employees (i.e., hiring), to open business bank accounts and apply for business loans/credit, and to apply for business licenses.
  • Change in Structure: If a business significantly changes its structure, it may need a new EIN. Examples of this might include a change in leadership like partnership or sole proprietorship or if a business becomes a subsidiary of another business.

Tell Me More

The IRS uses your EIN to keep track of your business tax returns, and other financial institutions may ask for it as part of their identity verification processes. Having an EIN is essential for businesses to operate legally and efficiently, ensuring compliance with federal tax laws and enabling smooth financial transactions.

Who Needs an EIN?

Most businesses need an EIN, including those that engage in actions such as:

  • Having employees.
  • Operating as a corporation or partnership.
  • Filing employment, excise, or alcohol, tobacco, and firearms tax returns.
  • Withholding taxes on income, other than wages, paid to a non-resident alien.
  • Utilize a Keogh Plan (a tax-deferred pension plan).
  • Involvement with certain types of organizations like non-profits, estates, trusts, or farmers' cooperatives.

These business entities generally fall into the following buckets:

  • Corporations and LLCs: Both are required to obtain an EIN (even if they don't have employees.)
  • Partnerships: All partnerships must have an EIN.
  • Sole Proprietors with Employees: Sole proprietors need an EIN if they hire employees or file excise or pension tax returns.
  • Non-Profit Organizations: All non-profits must have an EIN to apply for tax-exempt status and meet other regulatory requirements.

Uses of an EIN

An EIN is used for various purposes, including:

  • Filing federal and state tax returns.
  • Opening business bank accounts.
  • Applying for business licenses and permits.
  • Handling employee payroll and related taxes.
  • Applying for credit and loans.

There are also residual perks to utilizing an EIN, such as:

  • Creating a Separate Legal Entity: Helps establish the business as a separate legal entity from its owner(s), providing limited liability protection.
  • Crafting a Professional Image: Enhances the business's professional image, especially when dealing with clients, vendors, and financial institutions.
  • Offering Privacy Protection: Allows business owners to avoid using their SSNs for business purposes, reducing the risk of identity theft.

Obtaining an EIN

Businesses can apply for an EIN online, by mail, fax, or phone in international cases. The process is straightforward and typically involves providing basic information about the business, like legal name, mailing address, and type of entity.

Receiving/Changing EINs

Once issued, an EIN is permanent and does not expire. Businesses might need a new EIN if their structure changes significantly, such as converting from a sole proprietorship to a corporation, or if ownership changes substantially. However, changes like business name or location usually do not require a new EIN. Businesses that close or cease operations should notify the IRS to deactivate their EIN.

Examples:

  • A brand-new restaurant receives an EIN to hire employees, file payroll taxes, and open a business bank account.
  • A non-profit organization requires an EIN to apply for tax-exempt status and receive donations.
  • A freelance graphic designer might apply for an EIN to establish a business identity separate from personal finances.

EIN vs. SSN

While an EIN serves as a business's ID for tax purposes, a SSN serves the same function for individuals. An EIN helps maintain separation between personal and business finances and liabilities, which is crucial for legal and financial protection as your business continues to excel.

Related Glossary Terms